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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                   FORM 10-K
 
(MARK ONE)
[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934
 
                  FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1998
 
[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM__________ TO__________
 
                         COMMISSION FILE NUMBER 0-27046
 
                          QUINTEL COMMUNICATIONS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
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<S>                                            <C>
                   DELAWARE                                      22-3322277
       (STATE OR OTHER JURISDICTION OF                        (I.R.S. EMPLOYER
        INCORPORATION OR ORGANIZATION)                      IDENTIFICATION NO.)
 
             ONE BLUE HILL PLAZA                                   10965
            PEARL RIVER, NEW YORK                                (ZIP CODE)
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
 
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:  (914) 620-1212
 
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                                            TITLE OF CLASS          EXCHANGE ON WHICH REGISTERED
                                            --------------          ----------------------------
<S>                                 <C>                             <C>
SECURITIES REGISTERED PURSUANT               COMMON STOCK           NASDAQ NATIONAL MARKET
TO SECTION 12(b) OF THE ACT:               $.001 PAR VALUE
SECURITIES REGISTERED PURSUANT               COMMON STOCK
TO SECTION 12(g) OF THE ACT:               $.001 PAR VALUE
</TABLE>
 
     Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes  [X]       No  [ ]
 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (sec.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.  [ ]
                            ------------------------
 
     The number of shares outstanding of the Registrant's common stock is
16,679,746 (as of 3/5/99). The aggregate market value of the voting stock held
by nonaffiliates of the Registrant was approximately $14,225,000 (as of 3/5/99,
based upon a closing price of the Company's Common Stock on the Nasdaq National
Market on such date of $1.8125).
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
None.
 
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                          QUINTEL COMMUNICATIONS, INC.
                      INDEX TO ANNUAL REPORT ON FORM 10-K
               FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
                  FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1998
 
                               ITEMS IN FORM 10-K
 
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Facing page
PART I
  Item 1.     Business....................................................    1
  Item 2.     Properties..................................................   10
  Item 3.     Legal Proceedings...........................................   10
  Item 4      Submission of Matters to Vote of Security Holders...........  None
PART II
  Item 5.     Market for the Registrant's Common Equity and Related
              Stockholder Matters.........................................   11
  Item 6.     Selected Financial Data.....................................   12
  Item 7.     Management's Discussion and Analysis of Financial Condition
              and Results of Operations...................................   12
  Item 7A.    Quantitative and Qualitative Disclosures About Market
              Risk........................................................  None
  Item 8.     Financial Statements and Supplementary Data.................   22
  Item 9.     Changes in and Disagreements with Accountants on Accounting
              and Financial Disclosure....................................  None
PART III
  Item 10.    Directors and Executive Officers of the Registrant..........   23
  Item 11.    Executive Compensation......................................   26
  Item 12.    Security Ownership of Certain Beneficial Owners and
              Management..................................................   29
  Item 13.    Certain Relationships and Related Transactions..............   30
PART IV
  Item 14.    Exhibits, Financial Statement Schedules and Reports on Form
              8-K.........................................................   31
 
Signatures................................................................   34
</TABLE>
 
                          FORWARD LOOKING INFORMATION
                              MAY PROVE INACCURATE
 
     This Annual Report on Form 10-K contains certain forward-looking statements
and information relating to the Company that are based on the beliefs of
management, as well as assumptions made by and information currently available
to the Company, including the Company's continuing sources of revenue, cost
reduction plans, proposed offerings of new products and services and the
sufficiency of the Company's liquidity and capital. When used in this document,
the words "anticipate," "believe," "estimate," and "expect" and similar
expressions, as they relate to the Company, are intended to identify
forward-looking statements. Such statements reflect the current views of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions, including those described in this Annual Report
on Form 10-K. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated or
expected. The Company does not intend to update these forward-looking
statements.
<PAGE>   3
 
                                     PART I
 
ITEM 1.  BUSINESS
 
     Quintel Communications, Inc. (the "Company") is engaged in the direct
marketing and providing of various telecommunications products and services.
Additionally, the Company utilizes its extensive database to further provide
direct marketing services for its residential long distance customer acquisition
programs. The Company's revenues from the foregoing are generated through the
direct sale of products and services to consumers and through revenue sharing
arrangements with its residential long distance customer acquisition clients.
The telecommunications products and services offered by the Company in the
fiscal year ended November 30, 1998 consisted primarily of (i) telephone
entertainment services, such as live conversation horoscopes and psychic
consultations, and memberships in theme-related club 900 products ("Club 900
Products"); (ii) a residential distributor program agreement with LCI
International Telecom Corp., d/b/a Qwest Communications Services, a long
distance telephone service provider ("Qwest"), whereby the Company markets
Qwest's residential long distance products; and (iii) various enhanced telephone
services, including enhanced voice mail services and call-forwarding services.
 
TELEPHONE ENTERTAINMENT SERVICES
 
     The Company's telephone entertainment services are accessed by dialing
"900" numbers that are billed at either premium per-minute rates (pay-per-call)
or on a periodic basis through club memberships (Club 900 Product).
Entertainment services consist primarily of live psychic consultations designed
to capitalize on the current popularity of "new age" themes. "New age" refers to
astrological and psychic phenomena which can be explained through the use of
horoscopes, tarot card and psychic readings and prognostications. For the years
ended November 30, 1998, 1997 and 1996, the Company's "900" telephone
entertainment services accounted for approximately 43%, 73% and 76%,
respectively, of the Company's net revenues.
 
     Pay-Per-Call
 
     General.  The live psychic entertainment services marketed by the Company
permit callers to engage in live one-on-one conversations with psychic operators
and to receive personalized information responsive to the caller's requests.
These live conversation "900" entertainment services are currently billed at the
rate of $4.99 per minute; provided, however, that the first two to five minutes
of some calls to such live conversation lines are provided to the customer
without charge. For the years ended November 30, 1998, 1997 and 1996, the
Company's live conversation "900" entertainment services accounted for
approximately 26%, 67% and 76% of the Company's net revenues, respectively.
 
     The Company solicits customers for the "900" number services it markets by
providing access to toll-free "800" numbers for subjects of general interest and
as an introduction to the "900" services or by calling designated "900" numbers
directly from any telephone, except cellular phones, pay phones or any phone for
which "900 blocking" has been imposed or ordered. The per minute rates on
telephone services marketed by the Company are subject to applicable limitations
imposed by carriers, including the limitation currently imposed by AT&T, the
Company's primary long distance carrier, of $10 per minute.
 
     Discontinuance as Independent Revenue Source.  During 1998, the Company
experienced decreasing margins on its "900" entertainment services, attributable
to significant increases in marketing expenditures related thereto and customer
chargebacks. As a result, these services were not providing positive operating
results and cash flow. Consequently, during the quarter ended August 31, 1998,
the Company discontinued marketing such services as an independent revenue
source and began using them in conjunction with marketing the Company's other
products and services, including its residential distributor program agreement
with Qwest. See "-- Residential Long Distance Customer Acquisition Services."
Accordingly, as required by Statement of Financial Standards No. 121 ("FAS
121"), the Company reviewed long-lived assets, including goodwill, for
impairment. The Company evaluated the recoverability of its long-lived assets by
measuring the carrying amount of the assets against projected undiscounted
future cash flows associated with them. The Company determined that the "900"
entertainment services could not be disposed of and there was no
                                        1
<PAGE>   4
 
predictable estimate of any future cash flows associated with any alternative
uses. Accordingly, the Company concluded that the intangibles, primarily
goodwill, associated with the Company's 1996 acquisition of the remaining 50%
interest in New Lauderdale (the "Acquisition"), were impaired. As such, a
non-cash charge of approximately $18.5 million, representing the remaining
balance of the intangibles, primarily goodwill associated with the Acquisition,
was recorded at May 31, 1998. See "-- New Lauderdale."
 
     During the fourth quarter of the fiscal year ended November 30, 1998, the
Company increased the marketing of its "900" entertainment services, although
not as an independent revenue source, by expanding the marketing of toll-free
"800" numbers that provide access to subjects of general interest and serve as
an introduction to the Company's "900" services. Such marketing was increased to
enhance consumer response to the Company's other products and services on a
cost-effective basis, which is accomplished on a two-fold basis. First, all
callers to the Company's "800" toll-free numbers are automatically entered into
the databases used to market the Company's other products and services,
regardless if such callers actually follow through on the initial "800" call
with a call to the Company's "900" numbers. Second, if a caller elects to call
the Company's "900" number, he is solicited to use the Company's various other
products and services, including participating in its residential distributor
program with Qwest. See "-- Residential Long Distance Customer Acquisition
Services."
 
     Billing Modification.  Prior to December 1, 1998, whenever a call was made
to the Company's live conversation "900" entertainment services, the Company
collected the $4.99 billed to the customer directly from the phone company (via
the Company's billing service providers) and would then be responsible to pay
all processing costs related to the transmission of the call and the billing and
collection of the fees generated thereby. The Company would be subject to
further reductions in amounts collected pursuant to customer chargebacks
processed by the customer service centers of the phone companies. These
chargebacks were for the amounts disputed by the customers and ultimately
credited by the phone company to the customer's account. As a partial means of
avoiding the uncertainties of fluctuating chargeback rates, in December 1998,
the Company entered into an agreement with Access Resource Services, Inc.
("Access"), pursuant to which the Company provides advertising for Access' "900"
entertainment services. The principal advertising mediums supplied are broadcast
television media and direct mail solicitations. In consideration of the
provision of such advertising, the Company receives a flat fee per each minute
billed to each of Access' customers. Access is responsible to pay all the
processing costs related to the transmission of the call and the billing and
collection of the fees generated thereby, including customer chargebacks. The
flat fee amount paid to the Company is to be reviewed monthly, with adjustments
permitted to be made thereto for future billing periods based upon changes in
chargeback rate experiences and/or changes in the costs incurred on previously
processed calls. In accordance with the terms of the agreement with Access,
either party has the right to cancel such agreement upon 30 days' prior written
notice. The agreement with Access does not prohibit the Company from marketing
its own "900" entertainment services, which the Company continues to do in
accordance with its marketing strategy of utilizing its "900" entertainment
services as a cost effective lead-in to the Company's other products and
services. See "-- Discontinuance as Independent Revenue Source."
 
     Psychic Readers Network, Inc.  Psychic Readers Network, Inc., and its
subsidiaries and affiliates, including Access (collectively, "PRN"), currently
provide the Company with substantially all of its psychic operators. PRN
monitors and supervises the quality of independent psychic operators provided to
the Company. The Company pays PRN a per-minute fee based on caller connection
time. For the years ended November 30, 1998, 1997 and 1996, the Company paid
aggregate fees of approximately $7,600,000, $24,300,000 and $8,560,000,
respectively, to PRN for such services. The Company believes that PRN is
controlled by Messrs. Steven L. Feder and Peter Stolz. Based upon information
provided to the Company by such individuals, the Company believes that Messrs.
Feder and Stolz, along with a third individual, own an aggregate of 2,539,481
shares of the Common Stock of the Company, or 15.2% of the total shares
outstanding. In addition, Mr. Feder is an employee of the Company and was a
member of the Company's Board of Directors until his resignation therefrom on
January 19, 1999. See "Certain Relationships and Related Transactions."
 
                                        2
<PAGE>   5
 
     Club 900 Product
 
     The Company offers a theme-related membership club ("Club 900 product"),
whereby subscribers prepay a $39.95 fee for a 90-day membership term, in
addition to a free 30-day trial period. Upon members' enrollments, the Company
provides such members with an assortment of new age theme related entertainment
gifts, obtainable through certificate redemption, and 15 free minutes of live
psychic readings per month during the course of their membership and free 30-day
trial period. PRN is contractually responsible for all costs incurred in
connection with such live psychic readings. In the event a member exceeds his or
her 15 free minutes in any given month, such member is billed at the rate of
$4.99 per minute. PRN and the Company share equally in any net profits derived
therefrom. The Company currently has approximately 26,000 members in the Club
900. The Company commenced the marketing and billing of the Club 900 product in
January 1997. This product accounted for 17% and 6% of the Company's net
revenues for the fiscal years ended November 30, 1998 and 1997, respectively.
 
RESIDENTIAL LONG DISTANCE CUSTOMER ACQUISITION SERVICES
 
     During the fiscal year ended November 30, 1996, the Company entered into an
agreement with AT&T Communications, Inc. ("AT&T"), whereby it marketed AT&T's
long distance products. The Company commenced significant marketing efforts
under this agreement in the first quarter of fiscal 1997, and continued
marketing for the entire fiscal year ended November 30, 1997. During the third
quarter of fiscal 1997, AT&T modified its contact and customer acquisition
strategies. These modifications severely limited the Company's ability to
successfully market AT&T's long distance products to its customer database. As a
result of the AT&T modifications, the Company significantly reduced its
marketing efforts under this arrangement in the fourth quarter of fiscal 1997.
The Company terminated its strategic corporate partnership with AT&T late in the
first quarter of fiscal 1998.
 
     The Company concluded an agreement with the long distance carrier LCI
International Telecom Corp., d/b/a Qwest Communications Services ("Qwest"), in
the first quarter of fiscal 1998. The Company currently provides marketing
services to Qwest, primarily through outbound telemarketing and broadcast media,
directed at the acquisition of residential long distance customers for Qwest. In
addition to commissions paid to the Company for its successful customer
acquisitions on behalf of Qwest, the agreement also calls for the Company to
participate in Qwest's net revenues earned from such acquired customers'
residential long distance usage.
 
     From the time a customer authorizes the Company to switch its long distance
telephone carrier to Qwest, the Company, Qwest and the local exchange carriers
(the "LECs") conduct extensive screening processes to ensure such authorizations
are clear and unambiguous. This is done to prevent claims of "slamming," the
process whereby a customer's telephone company is switched without that
customer's authorization. As a result of this heavy screening process, revenues
generated from these residential long distance customer acquisition services are
virtually unencumbered by chargebacks.
 
     During the fiscal year ended November 30, 1998, the net revenues generated
as a result of the Company's agreement with Qwest (which commenced in February
1998) and AT&T (which terminated in January 1998) were approximately $18,700,000
and $5,400,000, respectively, aggregating approximately $24 million for the
entire fiscal year ended November 30, 1998, or approximately 26% of the
Company's total net revenues during such period. During the fiscal year ended
November 30, 1997, the net revenues generated by the Company's strategic
corporate partnership with AT&T were approximately $26,300,000, or 14% of the
Company's total net revenues during such period.
 
ENHANCED TELEPHONE SERVICES
 
     The Company offered during the fiscal year ended November 30, 1998, various
enhanced telephone services ("enhanced services"), including voice mail and
call-forwarding services, which enhanced services, when aggregated, accounted
for approximately 24% of the Company's net revenues during such period. See
"-- Service Bureaus and Local Exchange Carriers."
 
                                        3
<PAGE>   6
 
     Voice Mail Services.  During the fiscal year ended November 30, 1996, the
Company began offering basic voice mail services, billed at $9.95 per month.
Such basic voice mail services include call answering and messaging accessed
through toll free "800" phone numbers. As an inducement to enroll potential
subscribers, the Company offered certain of its new age entertainment services
and products free of charge. During the second quarter of fiscal 1997, the
Company increased the monthly rate for all new subscribers to $14.95. Currently,
the Company bills approximately 130,000 customers for its voice mail services,
with substantially all being billed at $9.95 per month. For the fiscal years
ended November 30, 1998, 1997 and 1996, voice mail services collectively
accounted for approximately 21%, 12% and 17%, respectively, of the Company's net
revenues.
 
     Call Forwarding Services.  During the fiscal year ended November 30, 1998,
the Company commenced billing a call-forwarding product under the brand name "EZ
Page." This product allowed a subscriber to pre-program his own personalized
"800" number, so that incoming calls to that "800" number would be redirected in
accordance with such pre-programmed instructions. The subscriber would pay a fee
of $9.95 per month for the EZ Page service and would pay an additional
per-minute fee based upon usage. During the fiscal year ended November 30, 1998,
the Company expended approximately $1 million to enable the Company to bill EZ
Page on such per usage basis throughout most of the country. As a result of a
cessation of billing for certain of the Company's services by the Company's
billing service provider (as discussed below in the "Service Bureaus and Local
Exchange Carriers" section), the Company switched to a new billing service
provider for such services. This new billing service provider did not have the
necessary authorizations from the LECs to bill for such services upon a per
usage basis. Accordingly, the Company converted its EZ Page records to Voice
Mail records (which are billed on a flat rate basis) and all subscribers for EZ
Page are now billed as Voice Mail subscribers. The 130,000 subscribers referred
to in the preceding "Voice Mail Services" section includes those subscribers
formerly enrolled in the EZ Page service.
 
OTHER PRODUCTS AND SERVICES
 
     The Company offered other various products and services during the fiscal
year ended November 30, 1998, including telephone security equipment, cellular
telephone products and services and financial information services. The Company
was also involved in a co-venture agreement with Paradigm Direct, Inc., whereby
such venture acquired conventional cellular phone customers, primarily through
outbound telemarketing, for the operating regions of both AT&T Wireless Services
of Florida and AT&T Wireless Services of Paramus, New Jersey. All of the
foregoing other products and services, when aggregated, accounted for
approximately 7.0% of the Company's net revenues during the fiscal year ended
November 30, 1998. The Company will not be offering any of the foregoing
products or services in 1999, and as of November 30, 1998, the Company sold its
interest in the Paradigm venture to its co-venturer.
 
SERVICE BUREAUS AND LOCAL EXCHANGE CARRIERS
 
     The Company has engaged West TeleServices Corporation ("West"), Federal
Transtel, Inc. ("Transtel") and VRS Billing Systems, a division of Integretel,
Inc., to provide billing and collection services in connection with the
Company's telephone entertainment products and services, including the "900"
number services, voice mail services and Club 900 products. These billing
service providers are the conduits between the Company and the LECs. West also
provides accounts receivable financing relating to "900" entertainment services
billed through West. Though the facility is available, the Company is not
currently financing any of its accounts receivable. In addition, West provides
other services, including call processing, inbound and outbound telemarketing
and production of pre-recorded programs.
 
     In November 1998, three of the LECs, Ameritech Corp., Bell Atlantic Corp.
and SEC Communications, Inc., refused to bill customers for enhanced services
provided by the Company. This was a result of what the LECs claim was excessive
complaints by customers for "cramming" (unauthorized charges billed to a
customer's phone bill) against the Company and its affiliates. This billing
cessation effectively prevents the Company from selling its enhanced services in
those areas serviced by such LECs. The remaining LECs have not altered their
billing practices for the Company's services and the Company continues to offer
its enhanced services in those areas.
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<PAGE>   7
 
     As a result of such LEC imposed billing cessation, in November 1998, the
primary billing service provider for the Company's enhanced services, Billing
Information Concepts Corporation ("BIC"), terminated its arrangement with the
Company for providing billing for the Company's enhanced services. BIC continues
to service all data relating to post-billing adjustments to records billed prior
to BIC's self-imposed billing cessation. In December 1998, the Company entered
into an agreement with Transtel, whereby Transtel provides the billing services
previously provided by BIC. In effect, between the termination of the BIC
billing service arrangement and the commencement of billing under the agreement
with Transtel (approximately two months), the Company was unable to bill for any
enhanced services provided.
 
     The Company is dependent on its service bureaus to provide quality services
on a timely basis on favorable terms. While the Company believes its service
bureau needs could be transferred to alternate providers, if necessary, no
contracts to cover such a contingency are currently in effect. Accordingly,
failure by any existing bureaus to provide services, such as that experienced at
the end of the fourth quarter of fiscal 1998, would result in material
interruptions in the Company's operations. See "Forward Looking Information May
Prove to Be Inaccurate."
 
NEW LAUDERDALE
 
     In March 1995, the Company and PRN formed New Lauderdale, L.C. ("New
Lauderdale"), a Florida limited liability company, the successor to a joint
venture established in December 1994, for the purpose of creating, developing
and marketing theme-related membership clubs and related telephone entertainment
services.
 
     Pursuant to the terms of an acquisition agreement entered into between the
Company and PRN (the "Acquisition Agreement"), on September 10, 1996, the
Company acquired PRN's interest in New Lauderdale (the "Acquisition"). A portion
of the consideration paid by the Company therefor was 3,200,000 shares (the "PRN
Shares") of the Company's Common Stock. The PRN Shares delivered at the closing
of the Acquisition were issued to the shareholders of PRN, Steven L. Feder,
Thomas H. Lindsey and Peter Stolz (the "PRN Principals"). Based upon information
provided to the Company by such individuals, the Company believes that as of
March 5, 1999, such individuals own, in the aggregate, 2,539,481 shares, or
15.2% of the outstanding Common Stock of the Company. A registration statement
including the PRN Shares was declared effective by the Securities and Exchange
Commission (the "Commission") on December 19, 1996. The following is a summary
of the relevant and material items related to the Acquisition:
 
          Impairment of Goodwill.  During 1998, the Company experienced
     decreasing margins on its "900" entertainment services, attributable to
     significant increases in marketing expenditures related thereto and
     customer chargebacks. As a result, these services were not providing
     positive operating results and cash flow. Consequently, during the quarter
     ended August 31, 1998, the Company discontinued marketing such services as
     an independent revenue source and began using them in conjunction with
     marketing the Company's other products and services, including its
     residential distributor program agreement with Qwest. See "-- Residential
     Long Distance Customer Acquisition Services." Accordingly, as required by
     Statement of Financial Standards No. 121 ("FAS 121"), the Company reviewed
     long-lived assets, including goodwill, for impairment. The Company
     evaluated the recoverability of its long-lived assets by measuring the
     carrying amount of the assets against projected undiscounted future cash
     flows associated with them. The Company determined that the "900"
     entertainment services could not be disposed of and there was no
     predictable estimate of any future cash flows associated with any
     alternative uses. Accordingly, the Company concluded that the intangibles,
     primarily goodwill, associated with the Company's 1996 acquisition of the
     remaining 50% interest in New Lauderdale (the "Acquisition"), were
     impaired. As such, a non-cash charge of approximately $18.5 million,
     representing the remaining balance of the intangibles, primarily goodwill
     associated with the Acquisition, was recorded at May 31, 1998.
 
          Restriction on Resale of Shares.  Pursuant to the Acquisition
     Agreement, for as long as the PRN Principals as a group own 5% or more of
     Quintel's outstanding shares of Common Stock, as promulgated under Rule
     144(e) of the Securities Act of 1933, as amended (the "Securities Act"),
     the PRN Principals will not sell during any three-month period that number
     of shares which, in the aggregate,
 
                                        5
<PAGE>   8
 
     exceeds the greater of (a) 1% of the then outstanding shares of Common
     Stock of the Company, or (b) the average weekly trading volume of the
     Common Stock as listed on Nasdaq during the four calendar weeks preceding
     the sale of such shares of Common Stock, notwithstanding the fact that the
     shares owned by the PRN Principals have been registered for resale under
     the Securities Act or that each of the PRN Principals may not be an
     "affiliate" as defined under such Rule 144(e).
 
  Related Agreements
 
     The following are summaries of certain of the agreements which were
executed in connection with the Acquisition:
 
     Non-Competition and Right of First Refusal Agreement.  The Company, PRN and
the PRN Principals entered into a Non-Competition and Right of First Refusal
Agreement, whereby PRN, which is a direct competitor of the Company, and each of
the PRN Principals, agreed, for a period of five years from the closing of the
Acquisition, (i) not to engage in any activities competitive with the Company,
except for such business already conducted by PRN as of the consummation of the
Acquisition, and (ii) provide the Company with a right of first refusal with
respect to any future business developed by them. In June 1998, the Company
granted PRN the limited right to market its own club, in consideration for which
PRN provides the Company with all data relating to the billing for such club and
pays the Company a flat fee for each record billed for such club.
 
     Employment Agreement.  Upon the effective date of the Acquisition, the
Company entered into an employment agreement with Mr. Feder. Pursuant to the
terms of such employment agreement, Mr. Feder agreed to serve as the General
Manager of the business operated by New Lauderdale until April 30, 2001. Mr.
Feder agreed to devote at least 50% of his time to this employment and be
responsible for performing those services provided by him to New Lauderdale
prior to the consummation of the Acquisition. The Company obtained the rights to
any venture, new business idea, product, technology, or item of intellectual
property developed by Mr. Feder in the course of his employment with the
Company, as well as a right of first refusal with respect to any new business
venture developed by Mr. Feder with any third parties. See "Certain
Relationships and Related Transactions."
 
     Service Agreement.  The Company and PRN are parties to an agreement
pursuant to which PRN provides the Company with live psychic operator services
in connection with the operation of the Company's telephone entertainment
programs (the "Service Agreement"). In connection with the Acquisition, the
Service Agreement was amended to provide for an extension of its term for five
(5) years following the date of the closing of the Acquisition and to establish
a set fee schedule during the extended five (5) year term. In addition, the PRN
Principals agreed that Mr. Feder will continue to maintain control of PRN and
manage its operations, including the operation of the live psychic operator
network used by the Company in connection with its telephone entertainment
programs, and in order to secure the obligations of PRN, Feder and the other PRN
Principals under the Service Agreement, PRN granted the Company a security
interest in PRN's computer system hardware and software operating PRN's caller
distribution and psychic operators' scheduling and all agreements, arrangements
or understandings between PRN and its live psychic operators.
 
     Other Issues Related to the Acquisition.  Certain media, creative, computer
and production operations and personnel, formerly provided by PRN and/or New
Lauderdale, for the benefit of PRN, New Lauderdale and the Company, were
transferred to the Company and are now performed exclusively by the Company for
the benefit of such parties. During the fiscal year ended November 30, 1998, PRN
paid approximately $685,000 to the Company for media services. In addition to
payments for psychic operators as described above, PRN provides certain
non-psychic services and facilities to the Company presently billed at an
approximate rate of $14,000 per month.
 
STRATEGY
 
     The Company intends to actively pursue a strategy of (i) reducing its
overhead; (ii) continuing to operate those lines of its business which the
Company believes can be profitably maintained subsequent to such reduction of
overhead; (iii) seeking alternative methods of direct telemarketing to replace
the Company's
                                        6
<PAGE>   9
 
reduced marketing of its "900" entertainment services; and (iv) expanding the
servicing of existing corporate clientele and developing relationships with new
strategic partners. No assurance can be given that the Company will be able to
implement such strategy. The failure to do so may have a material adverse impact
on the operations of the Company. See "Forward Looking Information May Prove
Inaccurate".
 
TELEMARKETING
 
     The Company currently retains West to perform inbound telemarketing
activities. West provides telephone operators and voice response units on an
ongoing basis to respond to incoming telephone calls from recipients of mail
promotions or viewers of the Company's media advertising who respond to the
advertised product or services. The Company believes that an integral part of
inbound telemarketing is the opportunity to increase revenues by offering or
introducing additional products and services.
 
     The Company currently engages Millennium Teleservices and others to perform
the majority of the Company's outbound telemarketing activities which the
Company utilizes to fulfill marketing services for Qwest. These agencies provide
telephone operators on an ongoing basis to place calls to prospective customers
using consumer information and data obtained from the Company's inbound
telemarketing activities, mailing lists, data base and customer lists obtained
from its marketing activities.
 
DIRECT MAIL
 
     The Company engages in direct mail campaigns designed to promote its
entertainment services and residential long distance acquisition services. These
direct mail pieces consist of notifications, promotions, periodicals and
subscription kits.
 
COMPETITION
 
     The Company faces intense competition in the marketing of its products and
services. The Company competes primarily on the basis of media placements on
television and through direct mail solicitations. Many of the Company's
competitors are well established, have reputations for success in the
development and marketing of services and have significant financial, marketing,
distribution, personnel and other resources. These financial and other
capabilities permit such companies to implement extensive advertising and
promotional campaigns, both generally and in response to efforts by additional
competitors to enter into new markets and introduce new services.
 
     In addition, because these industries have no substantial barriers to
entry, competition from smaller competitors in the Company's target markets and
from direct response marketing companies not currently offering services similar
to the Company's services are expected to continue to increase significantly.
The Company expects that direct marketing companies that have developed or are
developing new marketing strategies, as well as other companies that have the
expertise to allow the development of direct marketing capabilities, may attempt
to provide the products or services similar to those provided by the Company. It
is also possible for a small company to introduce a service or program with
limited financial and other resources through the use of third-party agencies.
 
     The Company's long-distance customer acquisition programs compete with all
other long-distance telephone companies and the telemarketers therefor. The
Company's new age products and services used in conjunction with the Company's
other products and services also compete with numerous other services and
products which provide similar entertainment value, such as in-person psychic
consultation and tarot card readings, newspapers, magazines, books and audio and
video cassettes featuring "new age" themes, internet access and various other
forms of entertainment which may be less expensive or provide other advantages
to consumers.
 
INSURANCE
 
     The Company may be subject to substantial liability as a result of claims
made by consumers arising out of services provided by the Company's servicing
contractors and their employees. The Company maintains a general liability
insurance policy that is subject to a per occurrence limit of $1,000,000, with a
$2,000,000 aggregate limit and an umbrella policy covering an additional
$10,000,000 of liability. In addition, the
 
                                        7
<PAGE>   10
 
Company has errors and omissions insurance with a limit of $5,000,000. The
Company also maintains Directors and Officers liability insurance policies
providing aggregate coverage of $10,000,000 for legal costs and claims. Such
insurance may not be sufficient to cover all potential future claims and
additional insurance may not be available in the future at reasonable costs. The
Company seeks to limit any potential liability by (i) providing disclaimers in
connection with its telephone entertainment services by identifying its "900"
services and the services provided pursuant to its voice mail services and Club
900 product as "entertainment;" and (ii) continue the extensive screening
process used by the Company, Qwest and the LECs before switching a customer's
long distance provider.
 
GOVERNMENT REGULATION
 
     All of the Company's entertainment services and advertisements are reviewed
by the Company's regulatory counsel, and management believes that the Company is
in substantial compliance with all material federal and state laws and
regulations governing its provision of "800" and "900" number entertainment
services, all of its billing and collection practices and the advertising of its
services and has obtained or is in the process of obtaining all licenses and
permits necessary to engage in telemarketing activities. Nevertheless, on or
about September 30, 1998, the Company was notified by the Federal Trade
Commission ("FTC") that the FTC was conducting an inquiry into the past and
present marketing practices of the Company to determine if the Company was
engaging in unfair or deceptive practices. In connection with such inquiry, the
Company was requested to submit certain materials and information to the FTC
relating to the operations of the Company from January 1, 1994 to the present.
The Company is cooperating fully with the FTC in connection with its inquiry. To
date, the Company has not been subject to any enforcement actions by any
regulatory authority and Management believes that the FTC inquiry will not
result in any enforcement actions or claims which would have a material adverse
effect on the Company. However, in the event the Company is found to have failed
to comply with applicable laws and regulations, the Company could be subject to
civil remedies, including substantial fines, penalties and injunctions, as well
as possible criminal sanctions, which would have a material adverse effect on
the Company. See "Forward Looking Information May Prove Inaccurate."
 
     At the request of the Federal Communications Commission, a group of the
largest Local Exchange Carriers (the "LECs") have developed a set of voluntary
Best Practices Guidelines (the "Guidelines") with regard to the problem of
"cramming" -- unauthorized, deceptive or ambiguous charges included on end-user
customers' monthly local telephone bills. The cramming problem has increasingly
been receiving a great deal of attention from federal and state legislators,
regulatory agencies, and law enforcement agencies throughout the country.
Legislation is pending to combat the cramming problem. The Guidelines and
legislation, if enacted, require that service providers obtain detailed and
documented authorization from end users prior to billing for miscellaneous
products or services. Advertising for products and services to be billed through
a certain type of billing mechanism known as the "4250 billing mechanism" will
need to be pre-approved by the LECs and clearinghouses prior to their billing.
Moreover, each LEC is in the process of revising its individual billing and
collection agreements to implement the Guidelines and further restrict the types
of services for which it will provide billing services. Consequently, the LECs
will have broad discretionary powers to restrict services for which the Company
may bill through the customer's telephone bill and assess administrative charges
to service providers when a charge for a product or service not pre-approved by
the LEC and/or authorized by the end user, is placed on the customer's bill. As
the Company employs the 4250 billing mechanism to bill for products and
services, the Guidelines (and possible legislation) and LEC restrictions will
impact on, and need to be taken into account in, formulating the Company's
business practices.
 
EMPLOYEES
 
     The Company currently employs 71 full-time employees, including four
executive officers, all of whom are located at the Company's principal executive
offices in Pearl River, New York and Fort Lauderdale, Florida. The Company
believes that its relations with its employees are satisfactory. None of the
Company's employees are represented by a union.
 
                                        8
<PAGE>   11
 
THE YEAR 2000 PROBLEM
 
     At the time computer programs were first being written, two digits were
used instead of four to define years on such programs. For example, the year
"1998" was written within such computer programs as "98." As a result, at the
onset of the new millennium, any programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations. This potential
difficulty is commonly referred to as the "Y2K Problem."
 
     The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the Y2K Problem. The Company
presently believes that all of its internal computer programs, software
packages, systems and networks are Y2K compliant. Within the past 12 months, the
Company has replaced all personal computers that were not Y2K compliant and
rewritten its entire billing system to become compliant. The Company also
recently acquired a new main database server that is compliant and that runs on
a commercially available software package that is compliant.
 
     Notwithstanding the foregoing, the Company is reliant on third parties for
the operation of the Company's day-to-day business. The Company cannot provide
any assurances that the steps being taken by such third parties, if any, will be
sufficient to eliminate the Y2K Problem from the computer systems used by such
third parties and relied upon by the Company. The Company has corresponded with
all its vendors, informing them that the Company will only conduct business with
those entities that are "Y2K" compliant. In addition, the Company only accepts
inbound files from outside sources that define years with four digit codes,
ensuring compliance. Lastly, the Company's customer service department operates
via the Company's computer network, which is compliant. However, in the event
modifications and conversions to computer systems are required by such third
parties and are not completed on a timely basis, the Y2K Problem may have a
material impact on the operations of the Company.
 
TRANSACTIONS WITH MAJOR CUSTOMERS
 
     The Company's "Residential Distributor Program Agreement" with Qwest
accounted for approximately 20% of the Company's net revenues in fiscal 1998. It
is anticipated that in fiscal 1999 the Qwest arrangement will account for a much
greater percentage of the Company's revenues in such year. If this proves to be
accurate, the Company would be subject to significant economic dependence on the
Qwest relationship. If the Qwest relationship were to be terminated, and the
Company was not able to replace such relationship within an acceptable period of
time, the Company would suffer a materially significant adverse impact on its
operations and its liquidity and capital resources. See "Forward Looking
Information May Prove Inaccurate."
 
POTENTIAL LEC ACTIVITY
 
     The Company's enhanced services accounted for approximately 24%, 12% and
17% of the Company's net revenues in fiscal 1998, 1997 and 1996, respectively.
At the request of the Federal Communications Commission, a group of the largest
LECs have developed a set of voluntary Best Practices Guidelines (the
"Guidelines") with regard to the problem of "cramming" -- unauthorized,
deceptive or ambiguous charges included on end-user customers' monthly local
telephone bills -- for services which include the Company's enhanced services.
The cramming problem has increasingly been receiving a great deal of attention
from federal and state legislators, regulatory agencies, and law enforcement
agencies throughout the country. Legislation is pending to combat the cramming
problem. The Guidelines and legislation, if enacted, require that service
providers obtain detailed and documented authorization from end users prior to
billing for miscellaneous products or services. Advertising for products and
services to be billed through a certain type of billing mechanism known as the
"4250 billing mechanism" will need to be pre-approved by the LECs and
clearinghouses prior to their billing. Moreover, each LEC is in the process of
revising its individual billing and collection agreements to implement the
Guidelines and further restrict the types of services for which it will provide
billing services. Consequently, the LECs will have broad discretionary powers to
restrict services for which the Company may bill through the customer's
telephone bill and assess administrative charges to service providers when a
charge for a product or service not pre-approved by the LEC, and/or authorized
by the end user, is placed on the customer's bill. As the Company employs the
4250 billing mechanism to bill for
 
                                        9
<PAGE>   12
 
products and services, particularly its enhanced services, the Guidelines (and
possible legislation) and LEC restrictions will impact on, and need to be taken
into account in, formulating the Company's business practices.
 
ITEM 2.  PROPERTIES
 
     The Company leases approximately 15,000 square feet of space at One Blue
Hill Plaza, Pearl River, New York, all of which is currently used for the
Company's principal executive offices. The lease for such premises expires on
July 31, 2006. The current monthly base rent is $21,875 per month which amount
will be increased to $26,875 per month commencing on August 1, 2001, for the
remainder of the term of the lease.
 
     The Company's wholly owned subsidiary, Calling Card Co., Inc., leases
approximately 11,800 square feet of space at 2455 East Sunrise Boulevard, Fort
Lauderdale, Florida, all of which is used for general office space. The lease
for such space expires on June 30, 2004. The current monthly rent is $15,921.28,
with such rent increasing by approximately three (3%) percent per year for the
remainder of the term of the lease.
 
ITEM 3.  LEGAL PROCEEDINGS
 
     On or about May 4, 1998, a complaint entitled "Joseph Chalverus, on behalf
of himself and all others similarly situated v. Quintel Entertainment, Inc.,
Jeffrey L. Schwartz and Daniel Harvey" was filed in the United States District
Court for the Southern District of New York; subsequently, a complaint entitled
"Richard M. Woodward, on behalf of himself and all others similarly situated v.
Quintel Entertainment, Inc., Jeffrey L. Schwartz and Daniel Harvey" was filed in
that same court, as was a complaint entitled "Dr. Michael Title, on behalf of
himself and all others similarly situated v. Jeffrey L. Schwartz, Jay Greenwald,
Claudia Newman Hirsch, Andrew Stollman, Mark Gutterman, Steven L. Feder, Michael
G. Miller, Daniel Harvey and Quintel Entertainment, Inc." (collectively, the
"Complaints"). In addition to the Company, the defendants named in the
Complaints are present and former officers and directors of the Company (the
"Individual Defendants"). The plaintiffs seek to bring the actions on behalf of
a purported class of all persons or entities who purchased shares of the
Company's Common Stock from July 15, 1997 through October 15, 1997 and who were
damaged thereby, with certain exclusions. The Complaints allege violations of
Sections 10(b) and 20 of the Securities Exchange Act of 1934, and allege that
the defendants made misrepresentations and omissions concerning the Company's
financial results, operations and future prospects, in particular relating to
the Company's reserves for customer chargebacks and its business relationship
with AT&T. The Complaints allege that the alleged misrepresentations and
omissions caused the Company's Common Stock to trade at inflated prices, thereby
damaging plaintiffs and the members of the purported class. The amount of
damages sought by plaintiffs and the purported class has not been specified.
 
     On September 18, 1998, the District Court ordered that the three actions be
consolidated, appointed a group of lead plaintiffs in the consolidated actions,
approved the lead plaintiffs' selection of counsel for the purported class in
the consolidated actions, and directed the lead plaintiffs to file a
consolidated complaint. The consolidated and amended class action complaint
("Consolidated Complaint") which has been filed asserts the same legal claims
based on essentially the same factual allegations as did the Complaints. On
February 19, 1999, the Company and the Individual Defendants filed a motion to
dismiss the Consolidated Complaint. Plaintiffs have served papers in opposition
to the motion to dismiss. The District Court has not yet ruled on the motion to
dismiss. The Company believes that the allegations in the Complaints are without
merit, and intends to vigorously defend the consolidated actions. No assurance
can be given, however, that the outcome of the consolidated actions will not
have a materially adverse impact upon the results of operations and financial
condition of the Company. See "Forward Looking Information May Prove
Inaccurate."
 
                                       10
<PAGE>   13
 
                                    PART II
 
ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
 
     Market Information.  Since December 1995, the Company's Common Stock has
traded on the Nasdaq National Market System under the symbol "QTEL". The
following table sets forth the high and low sales prices of the Common Stock as
reported by NASDAQ for each full quarterly period since such date.
 
<TABLE>
<CAPTION>
                                                            HIGH        LOW
                                                          --------    -------
<S>                                                       <C>         <C>
Fiscal Year Ended November 30, 1998
  First Quarter.........................................  $ 7.00      $     3.8125
  Second Quarter........................................    6.50            5.25
  Third Quarter.........................................    5.6875          1.50
  Fourth Quarter........................................    3.25            1.5625
Fiscal Year Ended November 30, 1997
  First Quarter.........................................  $13.00      $     6.75
  Second Quarter........................................   12.625           8.6875
  Third Quarter.........................................   17.00            9.50
  Fourth Quarter........................................   14.8125          5.50
Fiscal Year Ended November 30, 1996
  First Quarter.........................................  $11.50      $     4.375
  Second Quarter........................................   13.375           8.125
  Third Quarter.........................................   12.625           5.75
  Fourth Quarter........................................   10.125           5.875
</TABLE>
 
     Security Holders.  To the best knowledge of the Company, at March 5, 1999,
there were 40 record holders of the Company's Common Stock. The Company believes
there are numerous beneficial owners of the Company's Common Stock whose shares
are held in "street name."
 
     Dividends.  Except for S corporation distributions made to the Company's
stockholders prior to December 5, 1995 (the effective date of the initial public
offering of the Company's Common Stock), the Company has not paid, and has no
current plans to pay, dividends on its Common Stock. The Company currently
intends to retain all earnings for use in its business.
 
     Option Exchange.  In September 1998, the Stock Option Committee of the
Board of Directors resolved that each officer and employee of the Company who
had been granted options under the Company's Amended and Restated 1996 Stock
Option Plan (the "Plan") be offered, in recognition of their past and present
services performed on behalf of the Company and as an incentive for their
continued services in the future, the opportunity to surrender to the Company
any options previously granted them under the Plan in exchange for new options
(the "Option Exchange"), in accordance with the following formula:
 
        The number of shares of the Company's Common Stock underlying the new
        option will equal the quotient of (a) the product of (i) the number of
        shares underlying the option surrendered for exchange and (ii) the
        closing price of the Common Stock on the NASDAQ National Market System
        on the date such option is surrendered for exchange, divided by (b) the
        exercise price of the surrendered option.
 
     Simultaneously therewith, an identical resolution was passed by the Board
of Directors (with any interested directors abstaining from voting thereon)
offering the directors who were not employees of the Company the opportunity to
participate in the Option Exchange.
 
     The Company received notification on September 14, 1998 from the holders of
options to purchase 818,079 shares of Common Stock that such holders were
participating in the Option Exchange. The holders of the remaining options to
purchase 172,500 shares of Common Stock eligible to participate in the Option
Exchange did not elect to participate. The closing price of the Company's Common
Stock on September 14,
 
                                       11
<PAGE>   14
 
1998 was $1.75 per share. The number of shares underlying the options issued in
exchange for those surrendered for exchange was 230,140 shares.
 
ITEM 6.  SELECTED FINANCIAL DATA
 
     The following table presents selected historical financial data of the
Company for each of the five fiscal years ending November 30, 1998. The year
ended November 30, 1996 includes the results of operations of New Lauderdale,
L.C. from its acquisition date of September 10, 1996. The financial data set
forth should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the financial statements
of the Company.
 
<TABLE>
<CAPTION>
                                                                       YEAR ENDED NOVEMBER 30,
                                              -------------------------------------------------------------------------
                                                  1998            1997           1996           1995           1994
                                              ------------    ------------    -----------    -----------    -----------
<S>                                           <C>             <C>             <C>            <C>            <C>
STATEMENT OF OPERATIONS DATA:
Net revenue.................................  $ 94,690,251    $191,374,936    $86,666,768    $50,501,266    $22,771,465
Costs of sales..............................    80,037,115     149,821,363     64,661,256     36,732,610     17,521,985
Gross profit................................    14,653,136      41,553,573     22,005,512     13,768,656      5,249,480
Selling, general and administrative
  expenses..................................    14,356,892      18,880,769     10,159,226      3,467,008      3,012,588
Special Charges.............................    19,692,543
                                              ------------    ------------    -----------    -----------    -----------
(Loss) income from operations...............   (19,396,299)     22,672,804     11,846,286     10,301,648      2,236,892
Interest expense............................      (186,218)        (80,763)      (473,289)      (334,318)      (759,211)
Other income, primarily interest............     2,212,435       1,841,356        760,413        485,250
Equity in earnings of joint venture.........                                    4,939,653      2,860,304
                                              ------------    ------------    -----------    -----------    -----------
(Loss) income before provision for income
  tax.......................................   (17,370,082)     24,433,397     17,073,063     13,312,884      1,477,681
Provision (benefit) for income taxes........      (417,464)     10,069,616      4,898,633        220,335         54,842
                                              ------------    ------------    -----------    -----------    -----------
Net (loss) income...........................  $(16,952,618)   $ 14,363,781    $12,174,430    $13,092,549    $ 1,422,839
                                              ============    ============    ===========    ===========    ===========
Income before pro forma tax provision.......                                                 $13,312,884    $ 1,477,681
Pro forma income tax provision..............                                                   5,633,116        835,144
                                                                                             -----------    -----------
Pro forma net income........................                                                 $ 7,679,768    $   642,537
                                                                                             ===========    ===========
Basic net (loss) income per share...........  $      (1.00)   $        .77    $       .76
                                              ============    ============    ===========
Diluted net (loss) income per share.........         (1.00)            .76            .76
                                              ============    ============    ===========
Pro forma net income per share..............                                                 $       .64    $       .05
                                                                                             ===========    ===========
Common shares outstanding
  Basic.....................................    17,034,531      18,560,064     16,145,445     12,000,000     12,000,000
  Diluted...................................    17,034,531      18,878,790     16,124,743     12,000,000     12,000,000
BALANCE SHEET DATA:
Working capital.............................  $ 35,538,243    $ 43,674,688    $25,423,442    $ 3,217,627    $   494,738
Total assets................................    64,413,144     115,998,775     79,029,547     16,969,956      3,976,881
Total liabilities...........................    27,731,000      52,292,478     31,294,614     10,938,881      3,432,355
Stockholders' equity........................    36,682,144      63,706,297     47,734,933      6,031,075        544,526
</TABLE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
OVERVIEW
 
     Quintel Communications, Inc. (the "Company") is engaged in the direct
marketing and providing of various telecommunications products and services.
Additionally, the Company utilizes its extensive database to further provide
direct marketing services for its residential long distance customer acquisition
programs. The Company's revenues from the foregoing are generated through the
direct sale of products and services to consumers and through revenue sharing
arrangements with its residential long distance customer acquisition clients.
The telecommunications products and services offered by the Company in the
fiscal year ended November 30, 1998 consisted primarily of (i) telephone
entertainment services, such as live conversation
 
                                       12
<PAGE>   15
 
horoscopes and psychic consultations, and memberships in theme-related club 900
products ("Club 900 Products"); (ii) a residential distributor program agreement
with LCI International Telecom Corp., d/b/a Qwest Communications Services, a
long distance telephone service provider ("Qwest"), whereby the Company marketed
Qwest's residential long distance products; and (iii) various enhanced telephone
services, including enhanced voice mail and call-forwarding services.
 
     The Company anticipates that the percentage of the Company's revenues
generated from telephone entertainment services will comprise a smaller portion
of the Company's entire revenues from operations in future fiscal years, based
upon management's plans for the repositioning of the Company. Management intends
to primarily focus on direct marketing efforts on behalf of its clients,
utilizing its extensive database for customer procurement and by participating
in the revenue generated therefrom. To that end, the Company (i) entered into
the agreement with Qwest for the marketing of Qwest's long distance products,
and (ii) ceased marketing its "900" entertainment services as an independent
revenue source, now using such services in conjunction with the marketing of its
other products and services.
 
     The Company's telephone entertainment services, enhanced services and Club
900 Products, are billed and collected through the use of service bureaus, which
act as conduits for the Local and Long Distance Exchange Carriers. The balance
of the Company's activities, principally residential long distance customer
acquisition services, are billed and collected directly from the parties to the
agreements and do not require service bureau intervention. Historically, the
services offered by the Company have evolved based on changing consumer tastes
as well as the impact of telephone company billing practices and governmental
regulations.
 
     Revenues for the Company's telephone entertainment services are recognized
at the time a customer initiates a billable transaction, except for customer
fees for Club 900 Products and voice-mail services. New customer Club 900
Products and voice-mail service fees are recognized when the service is
rendered. Recurring monthly voice-mail service fees are recognized as customers
renew their subscription each month. All revenues are recognized net of an
estimated provision for customer chargebacks, which include refunds and credits.
The Company continually revises its reserves for chargebacks on a monthly basis,
in accordance with actual chargeback experience. Chargebacks for new products
and services without a performance history, are reserved for based on chargeback
experience gained from similar products and services. These initial estimates
for new product and service chargebacks are revised according to the products'
and services' actual chargeback experience accumulated in the accounting periods
subsequent to the product's or service's initial billing period. Since reserves
are established prior to the periods in which the chargebacks are actually
incurred, the Company's net revenues may be adjusted in later periods in the
event that the Company's experienced chargebacks vary from the amounts
previously reserved. See "-- Recent Developments."
 
     Revenues earned under the long distance customer acquisition program are
recorded upon the achievement of events particular to the program offering.
Subsequent to the delivery of the initial sales record to the respective long
distance carrier, specifically Qwest, the Company may be required to provide to
the customer certain fulfillment products and services, such as prepaid cellular
phones and complimentary airline tickets. All material costs applicable to the
provision of such fulfillment products and services are estimated and accrued in
marketing expenses at the time the associated revenues are recorded. This
estimation is adjusted to actual amounts in subsequent periods.
 
     During the year ended November 30, 1998, the Company commenced marketing
residential long distance products under its residential distribution program
agreement with Qwest. Additionally, the Company terminated the strategic
corporate partnership with AT&T in January 1998. Prior to such termination, the
Company marketed AT&T's residential long distance products.
 
     The Company offered other various products and services during the fiscal
year ended November 30, 1998, including telephone security equipment, cellular
telephone products and services and financial information services. The Company
was also involved in a co-venture agreement with Paradigm Direct, Inc., whereby
such venture acquired conventional cellular phone customers, primarily through
outbound telemarketing, for the operating regions of both AT&T Wireless Services
of Florida and AT&T Wireless Services of Paramus, New Jersey. All of the
foregoing other products and services, when aggregated, accounted for
approximately 7% of the Company's net revenues during the fiscal year ended
November 30,
                                       13
<PAGE>   16
 
1998. The Company will not be offering any of the foregoing products or services
in 1999, and as of November 30, 1998, the Company sold its interest in the
Paradigm venture to its co-venturer.
 
RECENT DEVELOPMENTS
 
     During 1998, the Company experienced decreasing margins on its "900"
entertainment services, attributable to significant increases in marketing
expenditures related thereto and customer chargebacks. As a result, these
services were not providing positive operating results and cash flow.
Consequently, during the quarter ended August 31, 1998, the Company discontinued
marketing such services as an independent revenue source and began using them in
conjunction with marketing the Company's other products and services, including
the residential long distance customer acquisition services agreement with
Qwest. Accordingly, as required by Statement of Financial Standards No. 121
("FAS 121"), the Company reviewed long-lived assets, including goodwill, for
impairment. The Company evaluated the recoverability of its long-lived assets by
measuring the carrying amount of the assets against projected undiscounted
future cash flows associated with them. The Company determined that the "900"
entertainment services could not be disposed of and there was no predictable
estimate of any future cash flows associated with any alternative uses.
Accordingly, the Company concluded that the intangibles, primarily goodwill,
associated with the Company's 1996 acquisition of the remaining 50% of New
Lauderdale, L.C. were impaired. As such, a non-cash charge of approximately
$18.5 million, representing the remaining balance of the intangibles associated
with such acquisition, was recorded at May 31, 1998.
 
     The Company's "Residential Distributor Program Agreement" with Qwest
accounted for approximately 20% of the Company's net revenues in fiscal 1998. It
is anticipated that in fiscal 1999 the Qwest arrangement will account for a much
greater percentage of the Company's revenues in such year. If this proves to be
accurate, the Company would be subject to significant economic dependence on the
Qwest relationship. If the Qwest relationship were to be terminated, and the
Company was not able to replace such relationship within an acceptable period of
time, the Company would suffer a materially significant adverse impact on its
operations and its liquidity and capital resources. See "Forward Looking
Information May Prove Inaccurate."
 
RESULTS OF OPERATIONS
 
     The Company's net revenues for its telecommunications products and services
for the three years ended November 30, 1998 consist of the following:
 
<TABLE>
<CAPTION>
                                                1998            1997           1996
                                             -----------    ------------    -----------
<S>                                          <C>            <C>             <C>
Net Revenues:
  "900" Entertainment Services.............  $24,505,994    $128,925,620    $71,159,083
  Club 900 Products........................   16,418,901      11,305,734
  Enhanced Services........................   23,077,470      21,694,753     14,629,410
  Long Distance Acquisitions...............   24,104,551      26,489,559        164,010
  Other....................................    6,583,355       2,959,270        714,265
                                             -----------    ------------    -----------
                                             $94,690,251    $191,374,936    $86,666,768
                                             ===========    ============    ===========
</TABLE>
 
                                       14
<PAGE>   17
 
     The following table sets forth for the periods indicated the percentage of
net revenues represented by certain items reflected in the Company's statement
of income.
 
<TABLE>
<CAPTION>
                                                              YEAR ENDED NOVEMBER 30,
                                                              -----------------------
                                                              1998     1997     1996
                                                              -----    -----    -----
<S>                                                           <C>      <C>      <C>
Net Revenue.................................................  100.0%   100.0%   100.0%
                                                              -----    -----    -----
Cost of Sales...............................................   84.5     78.3     74.6
Gross Profits...............................................   15.5     21.7     25.4
Selling, general and administrative expenses................   15.2      9.9     11.7
Special charges.............................................   20.8        0        0
  Interest Expense..........................................    0.2      0.0      0.5
  Other Income, principally interest........................    2.3      1.0      0.9
  Equity in earnings of joint revenue.......................    0.0      0.0      5.7
Net (loss) Income...........................................  (17.9)     7.5     14.0
</TABLE>
 
     The following is a discussion of the financial condition and results of
operations of the Company for the years ended November 30, 1998, 1997 and 1996.
It should be read in conjunction with the consolidated financial statements of
the Company, the notes thereto and other financial information included
elsewhere in this report.
 
YEAR ENDED NOVEMBER 30, 1998 COMPARED TO YEAR ENDED NOVEMBER 30, 1997
 
     Net Revenue for the year ended November 30, 1998 was $94,690,251, a
decrease of $96,684,685, or 51%, as compared to $191,374,936, for the year ended
November 30, 1997. The decrease was attributable to decreases in net revenues
from the Company's "900" entertainment services of $104,419,626, or 81%, and
decreases in net revenues of $21,052,460, or 80%, resulting from the
discontinuance of the AT&T strategic corporate relationship. See "-- Recent
Developments" and "-- Residential Long Distance Customer Acquisition Services."
Such net revenue decreases were partially offset by increases in net revenues
from the Company's residential long distance customer acquisition services under
the Qwest agreement of $18,667,452. See "-- Residential Long Distance Customer
Acquisition Services." Additionally, decreases were offset by increases in net
revenues from the Company's Club 900 Products of $5,113,167, or 45%, and
increases in net revenues from the Company's enhanced voice mail networks and
other enhanced services ("enhanced services") of $1,382,717, or 6%. See
"Business -- Telephone Entertainment Services". Further offsetting increases
were realized from the Company's net revenues from cellular phone related
activities, both on a conventional and prepaid basis, of $3,624,065, or 122%.
These activities commenced, at significant levels, during the fourth quarter of
fiscal 1997 and such activities were discontinued during the fiscal year ended
November 30, 1998. For the year ended November 30, 1998, "900" entertainment
services, enhanced services, residential long distance customer acquisition
services (as provided to Qwest), Club 900 Product memberships, the AT&T
strategic corporate partnership and cellular phone activities and other products
approximated 26%, 24%, 20%, 17%, 6% and 7% of net revenues, respectively. For
the year ended November 30, 1997, "900" entertainment services, enhanced
services, Club 900 Product memberships, the AT&T strategic corporate partnership
and cellular phone activities and other products approximated 67%, 12%, 6%, 14%
and 1% of net revenues, respectively.
 
     The provisions for chargebacks, recorded as a direct reduction to revenues,
for the year ended November 30, 1998 were $56,496,612, a decrease of
$47,101,191, or 45%, as compared to $103,597,803 for the year ended November 30,
1997. The decrease is primarily attributable to a decrease in chargebacks from
the Company's "900" entertainment services of $53,463,756, or 67%, when compared
to the prior year. This decrease in chargebacks resulted from the Company's
efforts to reduce marketing the Company's "900" entertainment services. See
"-- Recent Developments." Additionally, during the year ended November 30, 1998,
the Company's Club 900 Product chargebacks decreased by $4,008,277, or 29%, when
compared to the prior comparable year. This decrease was the result of improved
chargeback rate experiences realized on the Club 900 Product during the year
ended November 30, 1998. The Company does not believe such improved chargeback
rate experiences will continue in the future. See "Forward Looking Information
May Prove Inaccurate".
 
     The Company's enhanced services' actual chargeback rate experience
increased during the year ended November 30, 1998 (45% of related gross sales)
when compared to the year ended November 30, 1997 (32%
 
                                       15
<PAGE>   18
 
of related gross sales). This increase in enhanced service chargebacks is
attributable to significant increases in customer service refunds and credits
(chargebacks) being issued by the Local Exchange Carriers, primarily in the
nine-month period from March 1, 1998 to November 30, 1998, as compared to the
prior year's comparable period. The Company believes that the increase in such
refunds and credits resulted from changes in Local Exchange Carriers' customer
refund policies. The Local Exchange Carriers made such changes in response to
concerns expressed by governmental regulatory authorities regarding the
necessity to make it easier for customers to have charges which they claim were
unauthorized removed from their telephone bills. See "-- Government Regulation"
and "Business -- Service Bureaus and Local Exchange Carriers." The Company
believes that the customer service policy changes implemented by the Local
Exchange Carriers also contributed to the increased chargebacks recognized on
the Company's "900" entertainment services during the fiscal year ended November
30, 1998.
 
     The impact of certain items on the operations of the Company, namely, cost
of revenues, chargebacks and marketing expenses, can be better understood in
relation to gross revenues, as opposed to net revenues. Accordingly, such
information is provided in the paragraphs that follow.
 
     During the year ended November 30, 1998, gross revenues from "900"
entertainment services were $50,270,718, with corresponding chargeback
allowances of $25,764,724, resulting in an approximate chargeback rate of 51%.
During the year ended November 30, 1997, gross revenues from the "900"
entertainment services were $208,154,100, with corresponding chargeback
allowances of $79,228,480, resulting in an approximate chargeback rate of 38%.
This chargeback rate increase of 13% was one of the primary factors contributing
to the Company's decision to discontinue marketing its "900" entertainment
services as an independent revenue source and use such services in conjunction
with the marketing of the Company's other products and services. See "-- Recent
Developments."
 
     During the year ended November 30, 1998, gross revenues from enhanced
services and Club 900 Product memberships were approximately $41,892,878 and
$26,067,730, respectively, as compared to approximately $32,110,085 and
$24,962,840, respectively, for the year ended November 30, 1997, an increase of
$9,782,793, or 30.4%, and $1,104,890, or 4.4%, respectively. The chargeback
allowances recognized during the year ended November 30, 1998 for the Company's
enhanced services and Club 900 Product memberships were $18,815,409 (45% of
related revenues) and $9,648,829 (37% of related revenues), respectively, as
compared to $10,415,332 (32% of related revenues) and $13,657,106 (55% of
related revenues), respectively, for the year ended November 30, 1997. During
the year ended November 30, 1998, gross revenues from the Company's combined
prepaid and conventional cellular activity were approximately $8,860,000, with
chargebacks of approximately $2,275,000, representing a chargeback rate of 26%.
The Company's other products and services contributed an immaterial amount to
chargebacks during the years ended November 30, 1998, 1997 and 1996. The
Company's residential long distance customer acquisition service revenues and
the AT&T strategic corporate partnership revenues are not encumbered by
chargebacks.
 
     Cost of revenues for the year ended November 30, 1998 was $80,037,115, a
decrease of $69,784,248, or 47%, as compared to $149,821,363 for the year ended
November 30, 1997. The decrease is directly attributable to reductions in
service bureau fees related to the decrease in revenues generated from the
Company's "900" entertainment services and decreases in advertising costs
expended in procuring such revenues. The service bureau fees, including the cost
of "psychic operators" related to the "900" entertainment services, were
approximately $26,800,000 and $69,200,000 for the years ended November 30, 1998
and 1997, respectively, accounting for approximately $42,400,000, or 61%, of the
total decrease in cost of revenues. In addition, the "900" entertainment
services advertising costs, principally from television broadcast media and
related commercial production costs, were approximately $17,700,000 and
$30,000,000 for the years ended November 30, 1998 and 1997, respectively,
accounting for approximately $12,300,000, or 18%, of the total decrease in the
cost of revenues. $11,300,000 of the decrease in cost of revenues was
attributable to the Company's implementation, during the quarter ended August
31, 1998, of its strategy to reposition the marketing emphasis of the "900"
entertainment services, in response to decreasing margins, increasing marketing
costs and increasing chargebacks. The cost of revenues in fiscal year ended
November 30, 1997 did not have a comparable reduction. The "900" entertainment
services are now used in conjunction with the marketing of the Company's other
products and services (as opposed to an independent revenue source). In
 
                                       16
<PAGE>   19
 
accordance with this repositioning, any amounts received by the Company in
providing "900" entertainment services, net of estimated chargebacks, are now
accounted for as a reduction to the cost of revenues for the Company's other
products and services. The effect recognized under such repositioning during the
year ended November 30, 1998 amounted to gross "900" entertainment service
revenues of approximately $20,900,000, net of corresponding chargebacks of
$9,600,000, being offset to cost of revenues for the reduction of approximately
$11,300,000 referenced above. The foregoing decreases to cost of revenues were
offset by increases in service bureau fees and marketing costs related to
increased gross revenues recognized from the Company's enhanced services, Club
900 Product and residential long distance and conventional cellular phone
customer acquisition services. Additionally, the decrease in cost of revenues
was further offset by cost increases incurred in the Company's test marketing of
its prepaid cellular phone business, which approximated $4,300,000 during the
year ended November 30, 1998. The Company discontinued the marketing for new
prepaid cellular phone customers during the third quarter of the year ended
November 30, 1998 and has subsequently disposed of such portion of its
operations and liquidated the related inventories.
 
     Cost of revenues as a percentage of net revenues increased to approximately
85% for the year ended November 30, 1998, from approximately 78% for the year
ended November 30, 1997. This gross margin deterioration is specifically
attributable to the Company's decreasing margins recognized on the Company's
"900" entertainment services. In response to the increased costs per unit of
sale generated for its "900" entertainment services, coupled with the
significant chargeback rate increases, as previously discussed, the Company has
discontinued marketing the "900" entertainment services as an independent
revenue source. Commencing in the quarter ended August 31, 1998, the "900"
entertainment services were repositioned and offered solely (1) for purposes of
acquiring marketing information for future marketing campaigns and (2) as a
premium offering, given in conjunction with the Company's other products and
services. See "-- Recent Developments."
 
     Gross revenues for the year ended November 30, 1998 were approximately
$151,200,000, with total marketing costs of approximately $58,100,000, or 38% of
such gross revenues. Gross revenues for the year ended November 30, 1997 were
approximately $295,000,000, with marketing costs of approximately $81,600,000,
or 28% of such gross revenues. Such increase in marketing costs, when measured
as a percentage of gross revenues, was 7%, or an increase of 25% in comparative
percentage terms. This increase is primarily due to the decreasing returns
realized on the marketing expenditures of the Company in generating "900"
entertainment services gross revenues prior to its discontinuance as an
independent revenue source and to the customer acquisition costs incurred by the
Company in the conduct of its residential long distance customer acquisition
programs. These "front end" acquisition costs are expected to be mitigated over
time, through recapture, by the future realization of revenues earned under the
usage/revenue sharing agreements attached to such programs. See "-- Residential
Long Distance Customer Acquisition Services."
 
     The remaining significant component of the cost of revenue is service
bureau fees. For the years ended November 30, 1998 and 1997, such service bureau
fees were approximately $27,800,000 and $53,200,000, respectively. This decrease
of approximately $25,400,000, or 48%, was primarily attributable to the
Company's decrease in "900" entertainment services revenues and its
corresponding reduction in service bureau usage. This decrease was partially
offset by increased service bureau fees relating to the Company's increase in
gross revenue activity from enhanced services, Club 900 Product memberships and
residential long distance customer acquisitions.
 
     Selling, general and administrative expenses (SG&A) for the year ended
November 30, 1998 were $14,356,892, a decrease of $4,523,877, or 24%, as
compared to $18,880,769 for the year ended November 30, 1997. The reduction is
primarily attributable to a decrease in amortization expense of approximately
$1,535,000, pursuant to an impairment write-off of intangibles, primarily
goodwill, during the quarter ended May 31, 1998. See "-- Recent Developments."
The portion of intangibles expensed by such impairment charge in the fiscal year
ended November 30, 1998 is separately classified under the financial statement
account heading "Special Charges", with the amount of such write-off
approximating $18,500,000. The decrease further resulted from net reductions in
officers' compensation of approximately $1,260,000 and decreases in customer
service costs of approximately $733,000. Increases in professional fees
($531,000), personnel costs ($216,000) and occupancy costs ($139,000) offset the
aforementioned decreases.
 
                                       17
<PAGE>   20
 
     During the year ended November 30, 1998, the Company recorded special
charges amounting to $19,692,543. The Company had no such special charges in the
year ended November 30, 1997. Included in these charges are (1) the non-cash
impairment charge of approximately $18,500,000, which represented the remaining
balance of the goodwill associated with the Acquisition (see "-- Recent
Developments") and (2) a charge for the write-down of assets of approximately
$1,178,000, relating to the Company's developing and test marketing of an
Internet telephony program, which commenced and was discontinued within the year
ended November 30, 1998.
 
     Other income for the year ended November 30, 1998 and 1997 consisted
primarily of interest income. For the year ended November 30, 1998, other income
was $2,212,435, an increase of $371,079, or 20%, as compared to $1,841,356 for
the year ended November 30, 1997. The increase is attributable to interest
earned on the Company's marketable securities, consisting primarily of direct
U.S. government obligations and interest earned on funds held in reserve for
future chargebacks by the Company's primary "900" entertainment service bureau.
See "-- Liquidity and Capital Resources."
 
     The Company's (benefit) provision for income taxes is the result of the
combination of federal statutory rates and required state statutory rates
applied to pre-tax income (loss). This combined effective rate was (2%) and 41%
for the years ended November 30, 1998 and 1997, respectively. Income tax benefit
for the year ended November 30, 1998 totaled $417,464 as compared to income tax
expense of $10,069,616 for the year ended November 30, 1997. The Company's
effective tax rate is higher than the federal statutory rate due to the addition
of state income taxes and certain expenses, principally goodwill amortization,
that are recognized for financial reporting purposes and are not deductible for
federal income tax purposes. In the year ended November 30, 1998, the Company
recorded an intangible impairment charge of approximately $18.5 million. See "--
Recent Developments". As of November 30, 1998, the Company had a net operating
loss carryback of approximately $21,000,000. Also at November 30, 1998, the
Company had approximately $14,100,000 of future tax deductible amounts,
principally arising from the future deductibility of net chargeback reserves and
the 1998 goodwill impairment charge. Due to the uncertain realization, through
carryforward, regarding the state deferred tax assets, the Company has recorded
a full valuation allowance against such state deferred tax assets at November
30, 1998. The remaining federal deferred tax assets were further reduced for a
valuation allowance. The federal valuation allowance reduces the federal
deferred tax assets to their realizable carryback value at November 30, 1998.
 
YEAR ENDED NOVEMBER 30, 1997 COMPARED TO YEAR ENDED NOVEMBER 30, 1996
 
     Net revenue for the year ended November 30, 1997 was $191,374,936, a net
increase of $104,708,168 or 121%, as compared to $86,666,768 for the year ended
November 30, 1996. Approximately $94,844,032, or 90.6% of such net increase was
attributable to the Acquisition. The Company's strategic corporate partnership
with AT&T accounted for approximately $26,325,549 or 25.1% of such net increase.
During fiscal 1997, the company marketed AT&T's long distance products under the
terms of the strategic corporate partnership. See "Business -- Residential Long
Distance Customer Acquisition Services." Net revenues from the Company's
enhanced voice mail networks comprised approximately $4,614,099, or 4.4% of such
net increase. Net revenues from the Company's Club 900 Product comprised
approximately $11,305,734, or 10.8% of such net increase. These increases were
partially offset by decreases to net revenues earned by one of the Company's
subsidiaries from its "900" entertainment services, resulting from the Company
shifting the billing and collection services for the subsidiary's "900" number
telephone calls to New Lauderdale's service contract. The related net revenue
reductions approximated $33,541,715. Such consolidation of service contracts
allowed the Company to reduce processing and administration costs associated
with its "900" number business. During the year ended November 30, 1997, the
Company completed the transition of changing all "900" number entertainment
lines from $3.99 to $4.99 per minute. For the year ended November 30, 1997, the
Company recorded approximately 23 million billable "900" minutes, at the $4.99
price point, and approximately 24 million billable minutes, at the $3.99 price
point, as compared to approximately 25 million minutes, primarily billed at the
$3.99 price point, in the prior year.
 
     For the year ended November 30, 1997, "900" entertainment services, VM
services, the AT&T strategic corporate partnership, Club 900 Product memberships
and other products approximated 67%, 12%, 14%, 6%
                                       18
<PAGE>   21
 
and 1% of net revenues, respectively. For the year ended November 30, 1996,
"900" number entertainment services, VM Products and other products approximated
82%, 17% and 1% of net revenues, respectively. The provisions for chargebacks
for the year ended November 30, 1997 were $103,597,803, an increase of
$57,245,165, or 123%, as compared to $46,352,638 for the year ended November 30,
1996. The increase is primarily attributable to increased chargebacks on the
Company's "900" number entertainment services and, to a lesser extent,
chargebacks on the Company's Club 900 Product memberships, which commenced
billing in the first quarter of fiscal 1997. The provisions for chargebacks as a
percentage of gross revenues increased from approximately 34.9% for the year
ended November 30, 1996 to approximately 38.7% for the year ended November 30,
1997. These percentages exclude the AT&T strategic corporate partnership
revenues, which are not encumbered by chargebacks.
 
     Cost of sales for the year ended November 30, 1997 was $149,821,363, an
increase of $85,106,107, or 132%, as compared to $64,661,256 for the year ended
November 30, 1996. The increase in the cost of sales is directly attributable to
the consolidation of New Lauderdale's operations subsequent to the Acquisition,
increases in service bureau fees, marketing costs associated with the AT&T
strategic corporate partnership and increases in advertising cost associated
with the Company's "900" entertainment services. Cost of sales as a percentage
of gross revenue is principally due to decreased returns from the Company's
marketing expenditures. The increase was partially offset through the Company's
ability to renegotiate certain contract terms with its primary "900" number
service provider during fiscal 1997, pursuant to increased call volume as a
result of the Acquisition. Gross revenues for the year ended November 30, 1997
were $294,976,042, with marketing costs of approximately $81,576,000, or 27.7%
of such gross revenues. Gross revenues for the year ended November 30, 1996 were
$133,040,851, with marketing costs of approximately $31,795,000, or 23.9% of
such gross revenues.
 
     Selling, general and administration expenses (SG&A) for the year ended
November 30, 1997 were $18,880,769, an increase of $8,721,543, or 86%, as
compared to $10,159,226 for the year ended November 30, 1996. The increase in
SG&A is principally attributable to the consolidation of New Lauderdale's
operations subsequent to the Acquisition, increases in goodwill amortization of
$1,251,900 and increases in personnel costs of approximately $1,636,000
associated with the Company's growth. SG&A as a percentage of the Company's
gross revenue decreased from 7.6% during the year ended November 30, 1996, to
6.4% for the year ended November 30, 1997.
 
     Interest expense for the year ended November 30, 1997 was $80,763, a
decrease of $392,526, or 83% as compared to $473,289 for the year ended November
30, 1996. This decrease is directly attributable to the Company's discontinuance
of its accounts receivable financing during the prior fiscal year. See
"Liquidity and Capital Resources."
 
     Other income for the years ended November 30, 1997 and 1996 consisted
primarily of interest income. For the year ended November 30, 1997, interest
income was $1,841,356, and increase of $1,080,943, or 142%, as compared to
$760,413, for the year ended November 30, 1996. The increase is attributable to
interest earned on the Company's marketable securities, consisting primarily of
direct U.S. government obligations.
 
     For the year ended November 30, 1996, the Company recognized equity in
earnings of joint venture of $4,939,653, of which $4,432,000 was distributed to
the Company during such year. This was comprised entirely of the Company's 50%
interest in the net income of New Lauderdale's operations for the year then
ended. On September 10, 1996, the Company acquired the remaining 50% interest in
New Lauderdale. After the Acquisition, the Company commenced treating New
Lauderdale as a subsidiary and including its results of operations on a
consolidated basis in the Company's consolidated financial statements.
 
     The Company's effective tax rate was 41% for the year ended November 30,
1997, as compared with 29% for the year ended November 30, 1996. The year ended
November 30, 1996 included a tax benefit of approximately $1,782,000 relating to
the Company's conversion to the accrual basis of accounting in connection with
the termination of its S Corporation status. The Company's effective rate is
higher than the federal statutory rate due to the addition of state income taxes
and certain deductions taken for financial reporting purposes that are not
deductible for federal income tax purposes. The primary factor contributing to
 
                                       19
<PAGE>   22
 
the increase in the effective rate during the year ended November 30, 1997, as
compared with the prior comparable period, is nondeductible amortization
relating to the Acquisition.
 
     Net income increased to $14,363,781 for the year ended November 30, 1997,
as compared to net income of $12,174,430 for the prior comparable period, an
increase of $2,189,351, or 18%. This increase was primarily due to an increase
of $10,826,518 in the Company's income from operations, growth in the Company's
core business, the addition of new business lines and an increase of $1,080,943
in interest income. Such increases were offset, in part, by an increase in
goodwill amortization of $1,251,900, total salary increases of approximately
$2,894,000 and increases in income taxes of $5,170,983.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     At November 30, 1998, the Company had cash of $2,123,630. During the year
ended November 30, 1998, the Company used $7,940,087 in cash, which consisted of
$6,209,682 of net cash used in operating activities, $8,334,625 in net cash
provided by investing activities and $10,065,030 of net cash used in financing
activities. The Company's net loss of $16,952,618 was offset by non-cash items,
consisting principally of goodwill amortization, including the intangible
impairment charge of approximately $18,500,000.
 
     During the year ended November 30, 1998, the Company used $6,209,682 for
operating activities, primarily to fund its working capital requirements, the
significant components being the costs of advertising, promotion and service
bureau fees.
 
     The $8,334,625 in net cash provided by investing activities consisted of
$9,700,632 in cash provided from the net proceeds of marketable securities
transactions, offset by $1,366,007 in cash paid for the purchase of property and
equipment.
 
     The $10,065,030 of cash used in investing activities was expended
exclusively for the repurchase of the Company's Common Stock. On March 13, 1998,
the Company had purchased from Claudia Hirsch, a former director and officer,
1,969,601 shares of the Company's Common Stock for an aggregate purchase price
of $8,165,000, of which $8,110,000 was paid within the year ended November 30,
1998. The balance of $137,500 was to be paid in 10 consecutive monthly
installments of $13,750 in accordance with the terms of the purchase agreement.
As at November 30, 1998, $55,000 remained payable under such agreement. In July
1998, the Board of Directors of the Company authorized the repurchase, at
management's discretion, of up to 2 million shares of the Company's Common Stock
during the period July 15, 1998 through July 15, 1999. Pursuant thereto, as of
March 5, 1999, the Company has repurchased 949,153 common shares for an
aggregate repurchase price of $2,211,622, representing an average repurchase
price of $2.33 per share. During the previous seventeen months (August 1, 1997
to November 30, 1998), the Company incurred substantial increases in chargebacks
experienced on its "900" entertainment services. Pursuant to such increased
chargebacks, two of the Company's service providers instituted a cash reserve
policy. Under this cash reserve policy, the service providers withhold cash
flows from carrier collections in amounts that approximate the Company's future
expected chargebacks, as they relate to each service provider. As of November
30, 1998, the reserves withheld approximated $ 8,080,000 and are included in the
Company's accounts receivable. Historically, the Company has financed its
working capital requirements principally through cash flow from operations and
receivables financing. Although the Company is not currently dependent on cash
flow from receivables financing, credit lines for this purpose are being
maintained and the Company may avail itself of such financing in the future. See
"Forward Looking Information May Prove Inaccurate."
 
     The Company's primary cash requirements have been to fund the cost of
advertising and promotion. Additional funds may be used in the purchasing of
equipment and services in connection with the commencement of several new
business lines and further development of businesses currently being test
marketed. The Company currently has no material plans or commitments for capital
expenditures or significant working capital demands. Under currently proposed
operating plans and assumptions (including the substantial costs associated with
the Company's advertising and marketing activities), management believes that
projected cash flows from operations and available cash resources, including
expected federal tax carryback refunds and an available financing arrangement
with a service bureau, will be sufficient to satisfy the Company's anticipated
cash requirements for the next twelve months. The Company does not have any
long-
                                       20
<PAGE>   23
 
term obligations and does not intend to incur any such obligations in the
future. As the Company seeks to diversify with new telecommunication products
and services, the Company may use existing cash reserves, long-term financing,
or other means to finance such diversification. See "Forward Looking Information
May Prove Inaccurate."
 
RESIDENTIAL LONG DISTANCE CUSTOMER ACQUISITION SERVICES
 
     During the fiscal year ended November 30, 1996, the Company entered into an
agreement with AT&T Communications, Inc. ("AT&T"), whereby it marketed AT&T's
long distance products. The Company commenced significant marketing efforts
under this agreement in the first quarter of fiscal 1997, and continued
marketing for the entire fiscal year ended November 30, 1997. During the third
quarter of fiscal 1997, AT&T modified its contact and customer acquisition
strategies. These modifications severely limited the Company's ability to
successfully market AT&T's long distance products to its customer database. As a
result of the AT&T modifications, the Company significantly reduced its
marketing efforts under this arrangement in the fourth quarter of fiscal 1997.
The Company terminated its strategic corporate partnership with AT&T late in the
first quarter of fiscal 1998.
 
     The Company concluded the Qwest agreement in the first quarter of fiscal
1998, pursuant to which the Company provides marketing services to Qwest,
primarily through outbound telemarketing and broadcast media, directed at the
acquisition of residential long distance customers for Qwest. In addition to
commissions paid to the Company for its successful customer acquisitions on
behalf of Qwest, the agreement also calls for the Company to participate in
Qwest's net revenues earned from such acquired customers' residential long
distance usage.
 
     Net revenues from the strategic corporate partnership with AT&T for the
year ended November 30, 1998 and 1997 were $5,437,099 and $26,489,559,
respectively.
 
     During the year ended November 30, 1998, the Company recorded revenues of
approximately $18,667,452 under the Qwest agreement. To date, the results of the
Qwest program have not met management's expectations.
 
GOVERNMENT REGULATION
 
     All of the Company's entertainment services and advertisements are reviewed
by the Company's regulatory counsel, and management believes that the Company is
in substantial compliance with all material federal and state laws and
regulations governing its provision of "800" and "900" number entertainment
services, all of its billing and collection practices and the advertising of its
services and has obtained or is in the process of obtaining all licenses and
permits necessary to engage in telemarketing activities. Nevertheless, on or
about September 30, 1998, the Company was notified by the Federal Trade
Commission ("FTC") that the FTC was conducting an inquiry into the past and
present marketing practices of the Company to determine if the Company was
engaging in unfair or deceptive practices. In connection with such inquiry, the
Company was requested to submit certain materials and information to the FTC
relating to the operations of the Company from January 1, 1994 to the present.
The Company is cooperating fully with the FTC in connection with its inquiry. To
date, the Company has not been subject to any enforcement actions by any
regulatory authority and Management believes that the FTC inquiry will not
result in any enforcement actions or claims which would have a material adverse
effect on the Company. However, in the event the Company is found to have failed
to comply with applicable laws and regulations, the Company could be subject to
civil remedies, including substantial fines, penalties and injunctions, as well
as possible criminal sanctions, which would have a material adverse effect on
the Company. See "Forward Looking Information May Prove Inaccurate."
 
     At the request of the Federal Communications Commission, a group of the
largest Local Exchange Carriers (the "LECs") have developed a set of voluntary
Best Practices Guidelines (the "Guidelines") with regard to the problem of
"cramming" -- unauthorized, deceptive or ambiguous charges included on end-user
customers' monthly local telephone bills. The cramming problem has increasingly
been receiving a great deal of attention from federal and state legislators,
regulatory agencies, and law enforcement agencies throughout the country.
Legislation is pending to combat the cramming problem. The Guidelines and
legislation, if
                                       21
<PAGE>   24
 
enacted, require that service providers obtain detailed and documented
authorization from end users prior to billing for miscellaneous products or
services. Advertising for products and services to be billed through a certain
type of billing mechanism known as the "4250 billing mechanism" will need to be
pre-approved by the LECs and clearinghouses prior to their billing. Moreover,
each LEC is in the process of revising its individual billing and collection
agreements to implement the Guidelines and further restrict the types of
services for which it will provide billing services. Consequently, the LECs will
have broad discretionary powers to restrict services for which the Company may
bill through the customer's telephone bill and assess administrative charges to
service providers when a charge for a product or service not pre-approved by the
LEC, and/or authorized by the end user, is placed on the customer's bill. As the
Company employs the 4250 billing mechanism to bill for products and services,
the Guidelines (and possible legislation) and LEC restrictions will impact on,
and need to be taken into account in, formulating the Company's business
practices.
 
THE YEAR 2000 PROBLEM
 
     At the time computer programs were first being written, two digits were
used instead of four to define years on such programs. For example, the year
"1998" was written within such computer programs as "98". As a result, at the
onset of the new millennium, any programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations. This potential
difficulty is commonly referred to as the "Y2K Problem".
 
     The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be effected by the "Y2K" Problem. The Company
presently believes that its entire internal computer programs, software
packages, systems and networks are Y2K compliant. Within the past 12 months, the
Company has replaced all personal computers that were not Y2K compliant and
rewritten its entire billing system to become compliant. The Company also
recently acquired a new main database server that is compliant and that runs on
a commercially available software package that is compliant. The cost of all of
the foregoing did not have a material impact on the operations of the Company.
See "Forward Looking Information May Prove Inaccurate".
 
     Notwithstanding the foregoing, the Company is reliant on third parties for
the operation of the Company's day-to-day business. The Company can not provide
any assurances that the steps being taken by such third parties, if any, will be
sufficient to eliminate the Y2K problem from the computer systems used by such
third parties and relied upon by the Company. The Company has corresponded with
all its vendors, informing them that the Company will only conduct business with
those entities that are "Y2K" compliant. In addition, the Company only accepts
inbound files from outside sources that define years with four digit codes,
ensuring compliance. Lastly, the Company's customer service department operates
via the Company's computer network, which is compliant. However, in the event
modifications and conversions to computer systems are required by such third
parties and are not completed on a timely basis, the Y2K Problem may have a
material impact on the operations of the Company.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     Reference is made to the Financial Statements referred to in the
accompanying Index, setting forth the consolidated financial statements of
Quintel Communications, Inc. and subsidiaries, together with the report of
PricewaterhouseCoopers LLP dated March 10, 1999.
 
                                       22
<PAGE>   25
 
                                    PART III
 
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
DIRECTORS AND EXECUTIVE OFFICERS
 
     Set forth below are the directors and executive officers of the Company,
their respective names and ages, positions with the Company, principal
occupations and business experiences during the past five years and the dates of
the commencement of each individual's term as a director and/or officer.
 
<TABLE>
<CAPTION>
                  NAME                     AGE                     POSITION
                  ----                     ---                     --------
<S>                                        <C>     <C>
Jeffrey L. Schwartz......................   50     Chairman of the Board and Chief Executive
                                                     Officer
Jay Greenwald............................   34     President, Chief Operating Officer and
                                                   Director
Andrew Stollman..........................   33     Senior Vice President, Secretary and
                                                   Director
Daniel Harvey............................   40     Chief Financial Officer
Michael G. Miller........................   50     Director
Murray L. Skala..........................   51     Director
Mark Gutterman...........................   42     Director
Edwin A. Levy............................   60     Director
Paul Novelly.............................   55     Director
</TABLE>
 
DIRECTORS
 
     Jeffrey L. Schwartz has been Chairman and Chief Executive Officer of the
Company since January 1995, Secretary/Treasurer from September 1993 to December
1994 and a director since inception of the Company in 1993. From January 1979
until May 1998, Mr. Schwartz was also Co-President and a director of Jami
Marketing Services, Inc. ("Jami Marketing"), a list brokerage and list
management consulting firm, Jami Data Services, Inc. ("Jami Data"), a database
management consulting firm, and Jami Direct, Inc. ("Jami Direct"), a direct mail
graphic and creative design firm (collectively, the "Jami Companies"). The JAMI
Companies were sold by the principals thereof in May 1998.
 
     Jay Greenwald has been President and Chief Operating Officer of the Company
since January 1995, Vice President from August 1992 to December 1994 and a
director since inception. From January 1991 to August 1992, Mr. Greenwald was
Vice President of Newald Direct, Inc. ("Newald Direct") and, from July 1990 to
January 1991, President of Newald Marketing, Inc. ("Newald Marketing"),
companies engaged in direct response marketing.
 
     Andrew Stollman has been Senior Vice President, Secretary and a director of
the Company since January 1995 and was President from September 1993 to December
1994. From August 1992 to June 1993, Mr. Stollman was a consultant to Cas-El,
Inc., from November 1992 to June 1993, manager at Media Management Group, Inc.,
and from December 1990 to August 1992, national marketing manager for Infotrax
Communications, Inc. and Advanced Marketing & Promotions, Inc., companies
engaged in providing telephone entertainment services.
 
     Michael G. Miller has been a director of the Company since inception. From
1979 until May 1998, Mr. Miller was Co-President and a director of each of the
Jami Companies, which were sold by the principals thereof in May 1998. Mr.
Miller is currently an independent consultant. Mr. Miller is also a director of
JAKKS Pacific, Inc., a publicly-held company which develops, markets and
distributes children's toys.
 
     Murray L. Skala has been a director of the Company since October 1995. Mr.
Skala has been a partner in the law firm of Feder, Kaszovitz, Isaacson, Weber,
Skala & Bass LLP since 1976. Mr. Skala is also a director of JAKKS Pacific,
Inc., a publicly-held company which develops, markets and distributes children's
toys.
 
     Mark Gutterman has been a director of the Company since October 1995. Since
January 1, 1999, Mr. Gutterman has been the Chief Financial Officer of
Transaction Information Systems, Inc., a computer consulting and staffing
company. From 1980 through 1998, Mr. Gutterman was a partner in the accounting
 
                                       23
<PAGE>   26
 
firm of Feldman, Gutterman, Meinberg & Co. and its predecessor, Weiss & Feldman.
Mr. Gutterman is a Certified Public Accountant.
 
     Edwin A. Levy has been a director of the Company since November 1995. Mr.
Levy has been the Chairman of the Board of Levy, Harkins & Co., Inc., an
investment advisor, since 1979, and is also a director of Coastcast Corp., a
publicly-held company in the business of manufacturing golf club heads.
 
     Paul Novelly has been a director of the Company since May 1998. Since 1978,
Mr. Novelly has been the President and Chief Executive Officer of Apex Oil
Company, Inc., a company which, together with its subsidiaries, is engaged in
oil and gas exploration, transportation, trading and storage and coal mining.
Mr. Novelly also serves on the Board of Directors of several publicly-held
companies, including Coastcast Corp., Vista 2000, Inc., a marketer of personal
safety and home security devices, Imperial Bank, Imperial Bancorp, a bank
holding corporation, and Intrawest Corporation, a foreign company based in the
Bahamas.
 
     The Company has agreed, if so requested by the underwriter of the initial
public offering of the Company's securities, Whale Securities Co., L.P.
("Whale"), to nominate and use its best efforts to elect a designee of Whale as
a director of the Company or, at Whale's option, as a non-voting adviser to the
Company's Board of Directors. The Company's officers, directors and four of its
existing principal stockholders have agreed to vote their shares of Common Stock
in favor of such designee. Whale has not yet exercised its right to designate
such a person. Such right of designation of Whale is in effect until December 5,
2000.
 
     All directors hold office until the next annual meeting of stockholders and
the election and qualification of their successors. Directors receive no cash
compensation for serving on the Board of Directors other than reimbursement of
reasonable expenses incurred in attending meetings. Non-employee Directors of
the Company are compensated for their services and attendance at meetings
through the grant of options pursuant to the Company's Amended and Restated 1996
Stock Option Plan.
 
EXECUTIVE OFFICERS
 
     Officers are elected annually by the Board of Directors and serve at the
direction of the Board of Directors. Three of the Company's four executive
officers, Jeffrey L. Schwartz, Jay Greenwald and Andrew Stollman, are also
directors of the Company. Information with regard to such persons is set forth
above under the heading "Directors."
 
     The remaining executive officer is Mr. Daniel Harvey, the Company's Chief
Financial Officer. Mr. Harvey has held such position since January 1997. He
joined the Company in September 1996. From November 1991 to August 1996, Mr.
Harvey was a Senior Manager with the accounting firm of Feldman, Gutterman,
Meinberg & Co. Mr. Harvey is a Certified Public Accountant.
 
     The Company has obtained "key man" life insurance in the amount of
$1,000,000 on each of the lives of Jeffrey L. Schwartz, Jay Greenwald and Andrew
Stollman.
 
  Resignation of Directors and Executive Officers
 
     In February 1998, Mr. Vincent Tese resigned as a director of the Company.
Mr. Tese had held such position since March 1996. In March 1998, Claudia Newman
Hirsch resigned as a director and as Executive Vice President of the Company.
Ms. Newman Hirsch had been a director since the inception of the Company. She
had been Executive Vice President since January 1995 and a Vice President from
August 1992 through December 1994. In January 1999, Mr. Steven Feder resigned as
a director of the Company. Mr. Feder had held such position since October 1996.
The Company believes that all of such individuals resigned for personal reasons
and not as a result of any disagreement with the Company on any matter relating
to the Company's operations, policies or practices.
 
                                       24
<PAGE>   27
 
THE COMMITTEES
 
     The Board has an Audit Committee, a Compensation Committee and a Stock
Option Committee. The Board of Directors does not have a Nominating Committee,
and the usual functions of such a committee are performed by the entire Board of
Directors.
 
     Audit Committee.  The functions of the Audit Committee include
recommendations to the Board of Directors with respect to the engagement of the
Company's independent certified public accountants and the review of the scope
and effect of the audit engagement. The current members of the Audit Committee
are Messrs. Levy, Novelly and Skala.
 
     Compensation Committee.  The function of the Compensation Committee is to
make recommendations to the Board with respect to compensation of management. In
addition, the Compensation Committee administers plans and programs, with the
exception of the Company's stock option plans, relating to employee benefits,
incentives and compensation. The current members of the Compensation Committee
are Messrs. Skala and Gutterman.
 
     Stock Option Committee.  The Stock Option Committee determines the persons
to whom options are granted under the Company's stock option plans and the
number of options to be granted to each person. The current members of the Stock
Option Committee are Messrs. Novelly and Levy.
 
ATTENDANCE AT MEETINGS
 
     From December 1, 1997 through November 30, 1998, the Board of Directors,
Stock Option Committee, Audit Committee and Compensation Committee each met or
acted without a meeting pursuant to unanimous written consent nine times, five
times, one time and one time, respectively.
 
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
 
     To the best of the Company's knowledge, during the fiscal year ended
November 30, 1998, (i) Steven Feder, Thomas H. Lindsey, Michael Miller, Paul
Novelly, Peter Stolz and Vincent Tese each untimely filed one report on Form 4,
reporting one late transaction; (ii) Daniel Harvey, Jeffrey Schwartz and Andrew
Stollman each untimely filed two late reports on Form 4, reporting two late
transactions; (iii) Mark Gutterman untimely filed two late reports on Form 4,
reporting three late transactions; (iv) Jay Greenwald untimely filed three late
reports on Form 4, reporting three late transactions; (v) Mr. Novelly untimely
filed a Form 3 and Form 5, each reporting one late transaction; and (vi) Claudia
Newman Hirsch failed to file a Form 5. All of such individuals were executive
officers, directors and/or beneficial owners of more than 10% of the Company's
Common Stock during the fiscal year ended November 30, 1998. To the best of the
Company's knowledge, all other Forms 3, 4 or 5 required to be filed during the
fiscal year ended November 30, 1998 were done so on a timely basis.
 
                                       25
<PAGE>   28
 
ITEM 11.  EXECUTIVE COMPENSATION
 
     The following table sets forth the Company's executive compensation paid
during the three fiscal years ended November 30, 1998, 1997 and 1996 for the
Chief Executive Officer and the Company's four most highly compensated executive
officers of the Company (other than the Chief Executive Officer) whose cash
compensation for the fiscal year ended November 30, 1998 exceeded $100,000 (the
"Named Officers").
 
                           SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                                            LONG TERM COMPENSATION
                                                                 ---------------------------------------------
                     ANNUAL COMPENSATION                                 AWARDS                  PAYOUTS
--------------------------------------------------------------   -----------------------   -------------------
         (a)           (b)      (c)         (d)         (e)         (f)          (g)                    (i)
                                                       OTHER     RESTRICTED   SECURITIES     (h)        ALL
                                                      ANNUAL       STOCK      UNDERLYING    PLAN       OTHER
      NAME AND                 SALARY      BONUS     COMPENSA-     AWARDS      OPTIONS     PAYOUTS   COMPENSA-
 PRINCIPAL POSITION    YEAR     ($)         ($)       TION($)       ($)          (#)         ($)      TION($)
 ------------------    ----   --------    --------   ---------   ----------   ----------   -------   ---------
<S>                    <C>    <C>         <C>        <C>         <C>          <C>          <C>       <C>
Jeffrey Schwartz.....  1998   $453,750           0       0           0           8,750(2)     0          0
  Chairman and                                                                 128,495
  Chief Executive      1997   $412,500    $418,347       0           0               0        0          0
  Officer              1996   $375,000    $269,573       0           0               0        0          0
Jay Greenwald........  1998   $453,750           0       0           0           8,750(2)     0          0
  President and                                                                128,495
  Chief Operating      1997   $412,500    $418,346       0           0               0        0          0
  Officer              1996   $375,000    $269,573       0           0               0        0          0
Andrew Stollman......  1998   $302,500           0       0                       8,750(2)     0          0
  Senior Vice                                                                   96,260
  President and        1997   $243,750    $418,346       0           0               0        0          0
  Secretary            1996   $175,000    $269,573       0           0               0        0          0
Daniel Harvey(1).....  1998   $127,500    $ 50,000       0           0           7,729(3)     0          0
  Chief Financial      1997   $111,000    $ 25,000       0           0               0        0          0
  Officer
</TABLE>
 
---------------
 
(1) Mr. Harvey was first appointed the Company's Chief Financial Officer in
    January 1997. Prior to that time, Mr. Harvey was not employed as an
    executive officer of the Company.
 
(2) Represents shares underlying options issued in exchange for the surrender of
    options to purchase 25,000 shares pursuant to the Option Exchange. See
    "Market for the Registrant's Common Equity and Related Stockholder
    Matters -- Option Exchange."
 
(3) Represents shares underlying options issued in exchange for the surrender of
    options to purchase 26,000 shares pursuant to the Option Exchange. See
    "Market for the Registrant's Common Equity and Related Stockholder
    Matters -- Option Exchange."
 
                                       26
<PAGE>   29
 
     The following table sets forth certain information regarding the granting
of options to the Named Officers during the fiscal year ended November 30, 1998.
 
                       OPTION GRANTS IN LAST FISCAL YEAR
 
<TABLE>
<CAPTION>
                                                                                         POTENTIAL REALIZABLE
                                                                                       VALUE AT ASSESSED ANNUAL
                                                                                         RATES OF STOCK PRICE
                                                                                       APPRECIATION FOR OPTION
                                 INDIVIDUAL GRANTS                                               TERM
-----------------------------------------------------------------------------------    ------------------------
(a)                        (b)                (c)                           (e)           (f)           (g)
                        NUMBER OF          % OF TOTAL         (d)
                        SECURITIES        OPTIONS/SARS      EXERCISE
                        UNDERLYING         GRANTED TO       OR BASE
                       OPTIONS/SARS       EMPLOYEES IN       PRICE       EXPIRATION
        NAME            GRANTED(#)       FISCAL YEAR(1)    ($/SHARE)        DATE         5%($)         10%($)
        ----           ------------      --------------    ----------    ----------    ----------    ----------
<S>                    <C>               <C>               <C>           <C>           <C>           <C>
Jeffrey Schwartz.....      8,750(2)           0.81%         $   1.75       9/30/05      $ 21,546      $ 29,840
                         128,495(3)          12.01           2.13125       10/8/03       349,516       441,046
 
Jay Greenwald........      8,750(2)           0.81              1.75       9/30/05        21,546        29,840
                         128,495(3)          12.01           2.13125       10/8/03       349,516       441,046
 
Andrew Stollman......      8,750(2)           0.81              1.75       9/30/05        21,546        29,840
                          96,260(3)           8.99            1.9375       10/8/03       298,031       300,366
 
Daniel Harvey........      7,292(2)           6.80              1.75        9/4/01        14,772        16,985
                             437(2)(4)        0.04              1.75      12/26/02           930         1,120
</TABLE>
 
---------------
 
(1) Options to purchase a total of 1,069,580 shares of Common Stock were granted
    to the Company's employees, including the Named Officers, during the fiscal
    year ended November 30, 1998. Includes 181,940 shares issuable upon the
    exercise of options granted pursuant to the Option Exchange. See "Market for
    the Registrant's Common Equity and Related Stockholder Matters -- Option
    Exchange."
 
(2) Represents shares issuable upon the exercise of options granted pursuant to
    the Option Exchange.
 
(3) One-third of this option vested or vests on each of October 8, 1998, 1999
    and 2000.
 
(4) One-third of this option vested or vests on each of December 26, 1997, 1998
    and 1999.
 
                                       27
<PAGE>   30
 
     The following table sets forth certain information regarding options
exercised and exercisable during the fiscal year ended November 30, 1998 and the
value of the options held as of November 30, 1998 by the Named Officers.
 
                AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                        AND FISCAL YEAR-END OPTION VALUE
 
<TABLE>
<CAPTION>
                                                                  NUMBER OF UNEXERCISED
                                                                    OPTIONS AT FISCAL
                                                                       YEAR-END(1)
                                                              ------------------------------
NAME                                                          EXERCISABLE      UNEXERCISABLE
----                                                          -----------      -------------
<S>                                                           <C>              <C>
Jeffrey L. Schwartz.........................................     8,750(2)              0
                                                                42,832            85,663
Jay Greenwald...............................................     8,750(2)              0
                                                                42,832            85,663
Andrew Stollman.............................................     8,750(2)              0
                                                                32,087            64,173
Daniel Harvey...............................................     4,861(2)          2,431(2)
                                                                   146(2)(3)         291(2)(3)
</TABLE>
 
---------------
 
(1) None of the options held by the Named Officers were in-the-money at November
    30, 1998.
 
(2) Represents shares underlying options issued in exchange for options
    surrendered pursuant to the Exchange Plan. See "Market for the Registrant's
    Common Equity and Related Stockholder Matters -- Option Exchange."
 
(3) Such option was issued in the Option Exchange pursuant to Mr. Harvey's
    surrender of an option to purchase 1,000 shares of common stock, which
    option was granted to Mr. Harvey on December 26, 1997.
 
EMPLOYMENT AGREEMENTS
 
     The employment agreements between the Company and each of Jeffrey Schwartz,
Jay Greenwald and Andrew Stollman expired on November 30, 1998. Each of such
individuals have agreed to continue to work for the Company as employees-at-will
until such time as the Board of Directors has had an opportunity to discuss and
approve a compensation package for inclusion in written employment agreements
between the Company and such individuals. The Company and Messrs. Schwartz and
Greenwald have agreed that the compensation to be paid to each of them for their
services rendered would be $400,000 per annum until such time as written
employment agreements between the Company and such individuals have been
executed. Such amount is a reduction of $53,750 per annum from each of their
1998 salaries of $453,750. The Company and Mr. Stollman have agreed that the
compensation to be paid to such individual for his services rendered would
continue to be $302,500 per annum, the amount of Mr. Stollman's 1998 annual
salary, until such time as a written employment agreement between the Company
and Mr. Stollman has been executed.
 
BOARD COMPENSATION
 
     As a result of the Company's policy to compensate non-employee directors
for their services, the Company's Amended and Restated 1996 Stock Option Plan
(the "Plan") provides for an automatic one-time grant to all non-employee
directors of options to purchase 25,000 shares of Common Stock and for
additional automatic quarterly grants of options to purchase 6,250 shares of
Common Stock. The exercise prices for all of such non-employee director options
are the market value of the Common Stock on their date of grant.
 
                                       28
<PAGE>   31
 
COMPENSATION COMMITTEE INTERLOCK AND INSIDER PARTICIPATION
 
     The Compensation Committee of the Company's Board of Directors during the
fiscal year ended November 30, 1998 consisted of Mark Gutterman and Murray L.
Skala. See "Certain Relationships and Related Transactions."
 
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The following table sets forth information, as of March 5, 1999, based upon
information obtained from the persons named below, regarding beneficial
ownership of the Company's Common Stock by (i) each person who is known by the
Company to own beneficially more than 5% of the outstanding shares of its Common
Stock, (ii) each director of the Company, (iii) each of the Named Officers, and
(iv) all executive officers and directors of the Company as a group.
 
<TABLE>
<CAPTION>
NAME AND ADDRESS OF                                             NUMBER OF SHARES           PERCENT
BENEFICIAL OWNER(1)                                           BENEFICIALLY OWNED(2)      OF CLASS(2)
-------------------                                           ---------------------      -----------
<S>                                                           <C>                        <C>
Jay Greenwald...............................................        2,815,984(3)            16.8%
Steven L. Feder, Thomas H. Lindsey and Peter Stolz..........        2,539,481(4)            15.2
2455 East Sunrise Blvd.
Ft. Lauderdale, FL 33304
Jeffrey L. Schwartz.........................................        2,503,584(5)            14.9
Michael G. Miller...........................................        2,475,617(6)            14.8
Andrew Stollman.............................................        1,135,280(7)             6.6
Murray L. Skala.............................................           90,250(8)            *
750 Lexington Avenue
New York, NY 10022
Edwin A. Levy...............................................           86,250(9)            *
767 Third Avenue
New York, NY 10017
Mark Gutterman..............................................           30,205(10)           *
280 Plandome Road
Manhasset, NY 11030
Paul Novelly................................................           22,816(11)           *
8182 Maryland Avenue
St. Louis, MO 63105
All executive officers and directors as a group (9
  persons)..................................................        9,167,570(12)(13)       53.6%
</TABLE>
 
---------------
  *  Less than 1% of the Company's outstanding shares.
 
 (1) Unless otherwise provided, such person's address is c/o the Company, One
     Blue Hill Plaza, Pearl River, New York 10965.
 
 (2) The number of Shares of Common Stock beneficially owned by each person or
     entity is determined under the rules promulgated by the Securities and
     Exchange Commission (the "Commission"). Under such rules, beneficial
     ownership includes any shares as to which the person or entity has sole or
     shared voting power or investment power. The percentage of the Company's
     outstanding shares is calculated by including among the shares owned by
     such person any shares which such person or entity has the right to acquire
     within 60 days after March 5, 1999. The inclusion herein of any shares
     deemed beneficially owned does not constitute an admission of beneficial
     ownership of such shares.
 
 (3) Includes 51,582 shares of Common Stock issuable upon the exercise of an
     option held by Mr. Greenwald. Does not include 180,000 shares of Common
     Stock transferred in February 1998 by Mr. Greenwald to a limited
     partnership of which Mr. Greenwald is a partner.
 
 (4) Steven L. Feder, Thomas H. Lindsey and Peter Stolz have filed Forms 13D
     with the Commission classifying themselves collectively as a "group", as
     that term is defined in Section 13(d) of the Exchange Act. Such
     individuals, as a "group", are the beneficial owners of more than 5% of the
     outstanding Common Stock of the Company.
 
                                       29
<PAGE>   32
 
 (5) Includes 51,582 shares of Common Stock issuable upon exercise of an option
     held by Mr. Schwartz.
 
 (6) Includes 33,615 shares of Common Stock issuable upon exercise of options
     held by Mr. Miller.
 
 (7) Includes 10,837 shares of Common Stock issuable upon exercise of an option
     held by Mr. Stollman.
 
 (8) Includes 86,250 shares of Common Stock issuable upon exercise of options
     held by Mr. Skala.
 
 (9) Represents shares of Common Stock issuable upon exercise of options held by
     Mr. Levy.
 
(10) Includes 26,615 shares of Common Stock issuable upon exercise of options
     held by Mr. Gutterman. Also includes 3,590 shares of Common Stock issuable
     upon the exercise of an option held by Feldman, Gutterman, Meinberg & Co.,
     a firm in which Mr. Gutterman was a partner until his resignation therefrom
     in December 1998.
 
(11) Represents shares of Common Stock issuable upon exercise of options held by
     Mr. Novelly.
 
(12) Includes 7,584 shares of Common Stock issuable upon the exercise of options
     held by Mr. Daniel Harvey, Chief Financial Officer of the Company.
 
(13) Includes 410,721 shares of Common Stock issuable upon the exercise of
     options held by the executive officers and directors of the Company. See
     footnote (3) and footnotes (5) through (12), above.
 
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     The Company obtains a substantial number of psychics for its live psychic
and other services from PRN. The Company believes that PRN is principally owned
and controlled by Steven L. Feder and Peter Stolz. Based upon information
provided to the Company by counsel to such individuals, the Company believes
that Messrs. Feder and Stolz, along with a third individual, own an aggregate of
2,539,481 shares of Common Stock, representing approximately 15.2% of the
outstanding Common Stock of the Company. In addition, Mr. Feder is an employee
of the Company and, until January 1999, was a director of the Company.
 
     In December 1998, the Company entered into an agreement with Access
Resource Services, Inc., an affiliate of PRN ("Access"), pursuant to which the
Company provides advertising for Access' "900" entertainment services. The
principal advertising mediums supplied are broadcast television media and direct
mail solicitations. In consideration of the provision of such advertising, the
Company receives a flat fee per each minute billed to each of Access' customers.
Access is responsible to pay all the processing costs related to the
transmission of the call and the billing and collection of the fees generated
thereby, including customer chargebacks. The flat fee amount paid to the Company
is to be reviewed monthly with adjustments permitted to be made thereto for
future billing periods based upon changes in chargeback rate experiences and/or
changes in the costs incurred on previously processed calls. In accordance with
the terms of the agreement with Access, either party has the right to cancel
such agreement upon 30 days' prior written notice.
 
     The Company believes that all of the foregoing transactions and agreements
were advantageous to the Company and were on terms no less favorable to the
Company than could have been obtained from unaffiliated third parties.
 
     Mark Gutterman, a director of the Company, was a partner in the firm of
Feldman, Gutterman, Meinberg & Co. ("FGM"), one of the Company's accountants
during the fiscal year ended November 30, 1998, until his resignation therefrom
in December 1998. Burton Feldman, a partner in FGM, is the father-in-law of
Jeffrey L. Schwartz, the Chairman and Chief Executive Officer of the Company.
For the fiscal year ended November 30, 1998, the Company incurred charges of
approximately $91,000 for services rendered by FGM. Its fees were based
primarily on hourly rates. The Company believes that its relationship with FGM
was on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties.
 
     Murray L. Skala, a director of the Company, is a partner in the law firm of
Feder, Kaszovitz, Isaacson, Weber, Skala & Bass LLP, the Company's attorneys
("Feder Kaszovitz"). The Company incurred charges of approximately $431,000
during the fiscal year ended November 30, 1998. Feder Kaszovitz continues to
provide services to the Company during its current fiscal year. Its fees are
based primarily on hourly rates. The Company believes that its relationship with
such firm is on terms no less favorable to the Company than could have been
obtained from unaffiliated third parties.
 
                                       30
<PAGE>   33
 
     The Company had entered into a consulting agreement, effective October 1,
1995, with Michael Miller, a director and principal stockholder of the Company,
which expired on November 30, 1998. Under the terms of such consulting
agreement, Mr. Miller provided services in connection with identification and
engagement of celebrities to endorse the Company's services, the Company's
engagement of independent producers to produce commercials and infomercials and
the development of new entertainment services. The agreement provided that Mr.
Miller's services were subject to his availability and recognized his commitment
to other non-competitive business activities. The Company has paid Mr. Miller
consulting fees of $10,416, $11,458 and $12,604 per month for the fiscal years
ended November 30, 1996, 1997 and 1998, respectively. The agreement provided
that Mr. Miller was precluded from involvement in any other business which
competes with the Company during the term of the consulting agreement and for a
period of two years thereafter. Although the consulting agreement w/Mr. Miller
has expired, he continues to provide the consulting services enumerated therein
to the Company and the Company has been compensating Mr. Miller for such
services at the rate of $10,417 per month. Such arrangement has not been
formally agreed to and may be terminated by either party at-will.
 
                          FORWARD LOOKING INFORMATION
                              MAY PROVE INACCURATE
 
     This Annual Report on Form 10-K contains certain forward-looking statements
and information relating to the Company that are based on the beliefs of
management, as well as assumptions made by and information currently available
to the Company, including the Company's continuing sources of revenue, cost
reduction plans, proposed offerings of new products and services and the
sufficiency of the Company's liquidity and capital. When used in this document,
the words "anticipate," "believe," "estimate," and "expect" and similar
expressions, as they relate to the Company, are intended to identify
forward-looking statements. Such statements reflect the current views of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions, including those described in this Annual Report
on Form 10-K. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated or
expected. The Company does not intend to update these forward-looking
statements.
 
                                    PART IV
 
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
(a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
 
     (i) Financial Statements:
 
     See Index to Financial Statements.
 
     (ii) Financial Statement Schedules
 
     Schedule of Valuation and Qualifying Accounts and Reserves
 
     All other financial statement schedules have been omitted since either (i)
the schedule or condition requiring a schedule is not applicable or (ii) the
information required by such schedule is contained in the Consolidated Financial
Statements and Notes thereto or in Management's Discussion and Analysis of
Financial Condition and Results of Operation.
 
(b) REPORTS ON FORM 8-K.
 
     The Company filed no Current Reports on Form 8-K during the fourth quarter
of the fiscal year ended November 30, 1998.
 
                                       31
<PAGE>   34
 
(c) EXHIBITS.
 
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER
 -------
<S>         <C>
3.1.1       Articles of Incorporation of the Company, as amended(1)
3.1.2       Amendment to the Articles of Incorporation of the
            Registrant(2)
3.2         By-Laws of the Company(3)
10.1        Employment Agreement by and between the Company and Steven
            L. Feder(4)
10.2.1      Definitive Form of Non-Competition and Right of First
            Refusal Agreement between the Company and Steven L. Feder,
            Thomas H. Lindsey and Peter Stolz(4)
10.2.2      Definitive Form of Non-Competition and Right of First
            Refusal Agreement between the Company and Psychic Readers
            Network, Inc.(4)
10.2.3*+    Agreement Regarding 900 Number Telecommunications Programs
            and Modification of Noncompetition Agreement and Media
            Agreement between Access Resource Services, Inc. and the
            Company
10.2.4*+    Marketing Agreement between Access Resource Services, Inc.
            and the Company
10.2.5*+    Club Operating Agreement among Access Resource Services,
            Inc., Real Communication Services, Inc., Bahia Encounters,
            Inc., Steven L. Feder and the Company
10.3        Amended and Restated 1996 Stock Option Plan(5)
10.4.1      Lease of the Company's offices at One Blue Hill Plaza, Pearl
            River, New York(6)
10.4.2      Lease of office space for Calling Card Co., Inc. at 2455
            East Sunrise Boulevard, Fort Lauderdale, Florida(7)(P)
10.5*       Purchase and Sale Agreement among Paradigm Direct, Inc.,
            Paradigm Cellular, LLC and the Company
10.6*+      Servicing Agreement between West Interactive Corporation and
            the Company
10.7        Collateral Note and Security Agreement between West
            Interactive Corporation and the Company(3)
10.8        Collateral Note and Security Agreement between West
            Interactive Corporation and New Lauderdale(3)
10.9        Telemarketing Services Agreement between West Telemarketing
            Corporation Outbound and the Company(3)
10.10+      Billing and Information Management Services Agreement and
            Advanced Payment Agreement between Enhanced Services
            Billing, Inc. and the Company(3)
10.11       Amended and Restated Psychic Readers Network Live Operator
            Service Agreement between Psychic Readers Network, Inc. and
            the Company(4)
10.12+      Telemarketing Services Agreement between Advanced Access,
            Inc. and the Company(6)(P)
10.13+      Telemarketing Services Agreement between APAC TeleServices,
            Inc. and the Company(6)(P)
10.14+      Telemarketing Services Agreement between AT&T Wireless
            Services and the Company(6)(P)
10.15.1+    Telemarketing Services Agreement between AT&T Wireless
            Services and Paradigm Direct, Inc.(7)(P)
10.15.2*    Telemarketing Services Agreement between Paradigm Direct,
            Inc. and the Company
10.15.3*    Termination Agreement between Paradigm Direct, Inc. and the
            Company
10.16+      Telemarketing Services Agreement between Optima Direct, Inc.
            and the Company(6)(P)
10.17.1*    Marketing Services Agreement between Delta Three Direct LLC
            and the Company
10.17.2*    Operating Agreement of Delta Three Direct LLC
10.17.3*    Network Services Agreement between Delta Three, Inc. and
            Delta Three Direct LLC
10.17.4*+   Network Services Agreement between RSL Com U.S.A., Inc. and
            Delta Three Direct LLC
10.18+      Telemarketing Services Agreements between New Media
            Telecommunications, Inc. and the Company(6)(P)
10.19.1+    Telecommunications Services Agreement between AT&T
            Communications, Inc. and the Company(6)(P)
10.19.2+    Letter Agreement, dated November 12, 1997, amending the
            Telecommunications Services Agreement between AT&T
            Communications, Inc. and the Company(7)(P)
</TABLE>
 
                                       32
<PAGE>   35
 
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER
 -------
<S>         <C>
10.19.3+    Letter Agreement, dated January 19, 1998, amending the
            Telecommunications Services Agreement between AT&T
            Communications, Inc. and the Company(7)
10.20+      Billing and Collection Services Agreement between Federal
            Transtel, Inc. and the Company(6)(P)
10.21*      Billing and Information Management Services Agreement
            between Billing Concepts, Inc. and the Company
10.22+      Ownership Agreement between the Company, Calling Card Co.,
            Inc., Access Resource Services, Inc. and Real Communication
            Services, Inc.(7)
10.23.1+    Telecommunications Services Agreement between LCI
            International Telecom Corp. and the Company(7)(P)
10.23.2*+   Amendment to the Telecommunications Services Agreement
            between LCI International Telecom Corp. and the Company
10.23.3*+   Amended and Restated Telecommunications Services Agreement
            between LCI International Telecom Corp., d/b/a Qwest
            Communications Services, and the Company
10.24.1     Limited Liability Company Agreement between the Company and
            Paragon Cellular Services, Inc.(7)
10.24.2     Amendment No. 1 to Limited Liability Company Agreement
            between the Company and Paragon Cellular Services, Inc.(7)
10.25*+     Cellular Telephone Product and Service Agreement between
            U.S. Mobile Services, Inc. and the Company
10.26.1*+   Settlement and Release of New Lauderdale
10.26.2*+   Settlement and Release of Calling Card Co., Inc.
10.27*+     Media Agreement between Access Resource Services, Inc. and
            the Company
10.28*      Software License Agreement between US/Intelicom, Inc. and
            the Company
10.29.1*+   License Agreement between the Company and a Confidential
            Third Party
10.29.2*+   Escrow Agreement between the Company, the Law Firm of
            Swidler Berlin Shereff Friedman, LLP and a Confidential
            Third Party
21*         Subsidiaries of the Company
27*         Financial Data Schedule
</TABLE>
 
---------------
 *  Filed herewith.
 
 + Confidential treatment requested as to portions of this Exhibit.
 
(1) Filed as an Exhibit to the Company's Registration Statement on Form 8-A,
    dated October 23, 1995, and incorporated herein by reference.
 
(2) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
    fiscal quarter ended August 31, 1998, and incorporated herein by reference.
 
(3) Filed as an Exhibit to the Company's Registration Statement on Form S-1 (the
    "S-1 Registration Statement"), dated September 6, 1995 (File No. 33-96632),
    and incorporated herein by reference.
 
(4) Filed as an Exhibit to a Definitive Information Statement filed with the
    Commission, dated August 20, 1996, and incorporated herein by reference.
 
(5) Filed as an Exhibit to the Company's Proxy Statement filed with the
    Commission, dated July 21, 1997 and incorporated herein by reference.
 
(6) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
    fiscal year ended November 30, 1996, and incorporated herein by reference.
 
(7) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
    fiscal year ended November 30, 1997, and incorporated herein by reference.
 
(P) Filed by paper with the Commission pursuant to a continuing hardship
    exemption.
 
                                       33
<PAGE>   36
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
 
Dated: March 16, 1999
                                          QUINTEL COMMUNICATIONS, INC.
 
                                          By: /s/  JEFFREY L. SCHWARTZ
 
                                            ------------------------------------
                                                    Jeffrey L. Schwartz
                                                      Chairman and CEO
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
                      SIGNATURE                                     TITLE                    DATE
                      ---------                                     -----                    ----
<C>                                                      <S>                            <C>
               /s/ JEFFREY L. SCHWARTZ                   Chairman and Chief              March 16, 1999
-----------------------------------------------------      Executive Officer
                 Jeffrey L. Schwartz                       (Principal Executive
                                                           Officer)
 
                  /s/ JAY GREENWALD                      President, Chief Operating      March 16, 1999
-----------------------------------------------------      Officer and Director
                    Jay Greenwald
 
                  /s/ DANIEL HARVEY                      Chief Financial Officer         March 16, 1999
-----------------------------------------------------      (Principal Financial and
                    Daniel Harvey                          Accounting Officer)
 
                 /s/ ANDREW STOLLMAN                     Senior Vice President and       March 16, 1999
-----------------------------------------------------      Director
                   Andrew Stollman
 
                /s/ MICHAEL G. MILLER                    Director                        March 16, 1999
-----------------------------------------------------
                  Michael G. Miller
 
                 /s/ MURRAY L. SKALA                     Director                        March 16, 1999
-----------------------------------------------------
                   Murray L. Skala
 
                  /s/ EDWIN A. LEVY                      Director                        March 16, 1999
-----------------------------------------------------
                    Edwin A. Levy
 
                 /s/ MARK GUTTERMAN                      Director                        March 16, 1999
-----------------------------------------------------
                   Mark Gutterman
 
                                                         Director
-----------------------------------------------------
                    Paul Novelly
</TABLE>
 
                                       34
<PAGE>   37
 
                          QUINTEL COMMUNICATIONS, INC.
                                AND SUBSIDIARIES
 
                       CONSOLIDATED FINANCIAL STATEMENTS
                      AS OF NOVEMBER 30, 1998 AND 1997 AND
                          FOR EACH OF THE YEARS IN THE
                   THREE YEAR PERIOD ENDED NOVEMBER 30, 1998
 
                                       35
<PAGE>   38
 
                 QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
 
                 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
                          FINANCIAL STATEMENT SCHEDULE
 
<TABLE>
<CAPTION>
                                                                 PAGE
                                                              ----------
<S>                                                           <C>
Report of Independent Accountants...........................     F-1
Consolidated Balance Sheets as of November 30, 1998 and
  1997......................................................     F-2
Consolidated Statements of Operations for the years ended
  November 30, 1998, 1997 and 1996..........................     F-3
Consolidated Statements of Shareholders' Equity for the
  years ended November 30, 1998, 1997 and 1996..............     F-4
Consolidated Statements of Cash Flows for the years ended
  November 30, 1998, 1997 and 1996..........................  F-5 - F-6
Notes to Consolidated Financial Statements..................  F-7 - F-20
Schedule II -- Valuation and Qualifying Accounts and
  Reserves..................................................     S-1
</TABLE>
<PAGE>   39
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and Shareholders of
Quintel Communications, Inc.:
 
     In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Quintel Communications, Inc. and Subsidiaries (the "Company,")
previously known as Quintel Entertainment, Inc. at November 30, 1998 and 1997
and the consolidated results of their operations and their cash flows for each
of the years in the three year period ended November 30, 1998 in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule listed in the accompanying index presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
 
                                          PricewaterhouseCoopers, LLP
 
Melville, New York
March 10, 1999
 
                                       F-1
<PAGE>   40
 
                 QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                        AS OF NOVEMBER 30, 1998 AND 1997
 
<TABLE>
<CAPTION>
                                                                 1998            1997
                                                              -----------    ------------
<S>                                                           <C>            <C>
                          ASSETS:
Current assets:
  Cash and cash equivalents.................................  $ 2,123,630    $ 10,063,717
  Marketable securities.....................................   15,019,233      24,730,706
  Accounts receivable, trade................................   31,230,579      46,310,960
  Deferred income taxes.....................................   11,990,442      10,021,057
  Due from related parties..................................      754,089         237,485
  Prepaid expenses and other current assets.................    2,151,270       4,096,452
                                                              -----------    ------------
          Total current assets..............................   63,269,243      95,460,377
Property and equipment, at cost, net of accumulated
  depreciation..............................................    1,143,901       1,041,790
Intangible assets, net......................................                   19,496,608
                                                              -----------    ------------
          Total assets......................................  $64,413,144    $115,998,775
                                                              ===========    ============
 
                        LIABILITIES:
Current liabilities:
  Accounts payable..........................................  $ 4,453,663    $  4,653,862
  Accrued expenses..........................................    6,897,246       7,956,308
  Reserve for customer chargebacks..........................   15,494,138      38,196,114
  Due to related parties....................................      140,756         979,405
  Income taxes payable......................................      745,197
                                                              -----------    ------------
          Total current liabilities.........................   27,731,000      51,785,689
Deferred income taxes.......................................                      506,789
                                                              -----------    ------------
          Total liabilities.................................   27,731,000      52,292,478
                                                              -----------    ------------
Commitments and contingencies (Note 7)
 
                   SHAREHOLDERS' EQUITY:
Preferred stock -- $.001 par value; 1,000,000 shares
  authorized; none issued and outstanding
Common stock -- $.001 par value; authorized 50,000,000
  shares; issued and outstanding 16,679,746 shares and
  18,649,347 shares, respectively...........................       16,679          18,649
Additional paid-in capital..................................   38,955,275      39,027,700
Retained earnings (deficit).................................     (379,292)     24,663,931
Unrealized loss on marketable securities....................      (10,488)         (3,983)
Common stock held in Treasury, at cost, 773,066 shares......   (1,900,030)
                                                              -----------    ------------
          Total shareholders' equity........................   36,682,144      63,706,297
                                                              -----------    ------------
          Total liabilities and shareholders' equity........  $64,413,144    $115,998,775
                                                              ===========    ============
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       F-2
<PAGE>   41
 
                 QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
 
<TABLE>
<CAPTION>
                                                        1998            1997           1996
                                                    ------------    ------------    -----------
<S>                                                 <C>             <C>             <C>
Net revenue.......................................  $ 94,690,251    $191,374,936    $86,666,768
Cost of sales.....................................    80,037,115     149,821,363     64,661,256
                                                    ------------    ------------    -----------
          Gross profit............................    14,653,136      41,553,573     22,005,512
Selling, general and administrative expenses......    14,356,892      18,880,769     10,159,226
Special charges...................................    19,692,543
                                                    ------------    ------------    -----------
          (Loss) income from operations...........   (19,396,299)     22,672,804     11,846,286
Interest expense..................................      (186,218)        (80,763)      (473,289)
Other income, primarily interest..................     2,212,435       1,841,356        760,413
Equity in earnings of joint venture...............                                    4,939,653
                                                    ------------    ------------    -----------
          (Loss) income before provision for
            income taxes..........................   (17,370,082)     24,433,397     17,073,063
(Benefit) provision for income taxes..............      (417,464)     10,069,616      4,898,633
                                                    ------------    ------------    -----------
          Net (loss) income.......................  $(16,952,618)   $ 14,363,781    $12,174,430
                                                    ============    ============    ===========
Basic (loss) income per share:
  Net (loss) income...............................  $      (1.00)   $        .77    $       .76
                                                    ------------    ------------    -----------
  Weighted average shares outstanding.............    17,034,531      18,560,064     15,918,881
                                                    ============    ============    ===========
Diluted (loss) income per share
  Net (loss) income...............................  $      (1.00)   $        .76    $       .76
                                                    ------------    ------------    -----------
  Weighted average shares outstanding.............    17,034,531      18,878,790     16,124,743
                                                    ============    ============    ===========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       F-3
<PAGE>   42
 
                 QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
              FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
 
                                            COMMON STOCK       ADDITIONAL      RETAINED          TREASURY STOCK
                                        --------------------     PAID-IN       EARNINGS     -------------------------
                                          SHARES     AMOUNT      CAPITAL      (DEFICIT)       SHARES        AMOUNT
                                        ----------   -------   -----------   ------------   ----------   ------------
<S>                                     <C>          <C>       <C>           <C>            <C>          <C>
Balance, November 30, 1995............  12,000,000   $12,000   $   441,258   $  5,597,817
Collections on subscriptions
  receivable..........................
Distributions to S corporation
  shareholders........................                                         (6,897,097)
Common stock issued:
  Common stock offering...............   3,225,000     3,225    13,398,850
  Common stock issued in connection
    with acquisition..................   3,200,000     3,200    22,796,800
  Stock option exercises..............      27,368        27       136,812
Tax benefit from exercise of stock
  options.............................                              57,330
Contributed capital...................                             575,000       (575,000)
Unrealized gains on available for sale
  securities..........................
Net income for the year...............                                         12,174,430
                                        ----------   -------   -----------   ------------
Balance, November 30, 1996............  18,452,368    18,452    37,406,050     10,300,150
Common stock issued:
  Stock option exercises..............     152,797       153       837,597
  Warrant exercises...................      44,182        44       364,458
Tax benefit from exercise of stock
  options.............................                             419,595
Unrealized (losses) on available for
  sale securities.....................
Net income for the year...............                                         14,363,781
                                        ----------   -------   -----------   ------------
Balance, November 30, 1997............  18,649,347    18,649    39,027,700     24,663,931
Unrealized (losses) on available for
  sale securities.....................
Purchase of common stock held in
  treasury, at cost...................                                                       2,742,667   $(10,065,030)
Retirement of stock held in
  treasury............................  (1,969,601)   (1,970)      (72,425)    (8,090,605)  (1,969,601)     8,165,000
Net (loss) for the year...............                                        (16,952,618)
                                        ----------   -------   -----------   ------------   ----------   ------------
Balance, November 30, 1998............  16,679,746   $16,679   $38,955,275   $   (379,292)     773,066   $ (1,900,030)
                                        ==========   =======   ===========   ============   ==========   ============
 
<CAPTION>
                                          UNREALIZED
                                        GAINS (LOSSES)
                                              ON                             TOTAL
                                          MARKETABLE     SUBSCRIPTIONS   SHAREHOLDERS'
                                          SECURITIES      RECEIVABLE        EQUITY
                                        --------------   -------------   -------------
<S>                                     <C>              <C>             <C>
Balance, November 30, 1995............                     $(20,000)     $  6,031,075
Collections on subscriptions
  receivable..........................                       20,000            20,000
Distributions to S corporation
  shareholders........................                                     (6,897,097)
Common stock issued:
  Common stock offering...............                                     13,402,075
  Common stock issued in connection
    with acquisition..................                                     22,800,000
  Stock option exercises..............                                        136,839
Tax benefit from exercise of stock
  options.............................                                         57,330
Contributed capital...................
Unrealized gains on available for sale
  securities..........................     $ 10,281                            10,281
Net income for the year...............                                     12,174,430
                                           --------        --------      ------------
Balance, November 30, 1996............       10,281              --        47,734,933
Common stock issued:
  Stock option exercises..............                                        837,750
  Warrant exercises...................                                        364,502
Tax benefit from exercise of stock
  options.............................                                        419,595
Unrealized (losses) on available for
  sale securities.....................      (14,264)                          (14,264)
Net income for the year...............                                     14,363,781
                                           --------        --------      ------------
Balance, November 30, 1997............       (3,983)             --        63,706,297
Unrealized (losses) on available for
  sale securities.....................       (6,505)                           (6,505)
Purchase of common stock held in
  treasury, at cost...................                                    (10,065,030)
Retirement of stock held in
  treasury............................
Net (loss) for the year...............                                    (16,952,618)
                                           --------        --------      ------------
Balance, November 30, 1998............     $(10,488)       $     --      $ 36,682,144
                                           ========        ========      ============
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       F-4
<PAGE>   43
 
                 QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
 
<TABLE>
<CAPTION>
                                                       1998            1997            1996
                                                   ------------    ------------    ------------
<S>                                                <C>             <C>             <C>
Cash flows from operating activities:
  Net (loss) income..............................  $(16,952,618)   $ 14,363,781    $ 12,174,430
  Adjustments to reconcile net (loss) income to
     net cash (used in) provided by operating
     activities:
     Depreciation and amortization...............     1,284,039       2,620,146       1,268,166
     Reserve for customer chargebacks............   (22,701,976)     18,115,211       6,719,018
     Deferred income taxes.......................    (2,471,838)     (2,552,328)     (6,431,212)
     Other.......................................                                      (384,250)
     Special charges.............................    19,692,543
     ............................................
     Equity in net earnings of joint venture, net
       of dividends received.....................                                      (507,653)
     Changes in assets and liabilities, net of
       effects from acquisition of business:
       Accounts receivable.......................    15,080,381     (28,280,877)     (1,582,937)
       Due from related parties..................      (516,604)        406,683       3,102,976
       Prepaid expenses and other current
          assets.................................     1,729,104      (1,331,703)       (893,712)
       Other assets..............................                                     1,299,169
       Accounts payable..........................      (200,199)      2,088,479         511,786
       Income tax payable........................       745,197      (4,131,303)      3,894,446
       Accrued expenses..........................    (1,059,062)      4,917,798         362,118
       Due to related parties....................      (838,649)       (499,110)        565,806
                                                   ------------    ------------    ------------
          Net cash (used in) provided by
            operating activities.................    (6,209,682)      5,716,777      20,098,151
                                                   ------------    ------------    ------------
Cash flows from investing activities
  Purchases of securities........................   (72,275,879)    (65,649,246)    (37,434,414)
  Proceeds from sales of securities..............    81,976,511      55,500,000      23,240,075
  Acquisition, net of cash acquired..............                                       900,040
  Capital expenditures...........................    (1,366,007)       (847,053)       (251,628)
                                                   ------------    ------------    ------------
          Net cash provided by (used in)
            investing activities.................     8,334,625     (10,996,299)    (13,545,927)
                                                   ------------    ------------    ------------
Cash flows from financing activities:
  Loans payable, net.............................                                    (2,643,522)
  Proceeds from public offering, less expenses...                                    13,402,075
  Proceeds from collections on common stock
     subscriptions...............................                                        20,000
  Distributions to S corporation shareholders....                                    (6,897,097)
  Proceeds from stock options exercised..........                       837,750         136,839
  Proceeds from warrants exercised...............                       364,502
  Repurchase of common stock.....................   (10,065,030)
                                                   ------------    ------------    ------------
          Net cash (used in) provided by
            financing activities.................   (10,065,030)      1,202,252       4,018,295
                                                   ------------    ------------    ------------
</TABLE>
 
                                       F-5
<PAGE>   44
 
<TABLE>
<CAPTION>
                                                       1998            1997            1996
                                                   ------------    ------------    ------------
<S>                                                <C>             <C>             <C>
Net (decrease) increase in cash and cash
  equivalents....................................    (7,940,087)     (4,077,270)     10,570,519
Cash and cash equivalents, beginning of year.....    10,063,717      14,140,987       3,570,468
                                                   ------------    ------------    ------------
Cash and cash equivalents, end of year...........  $  2,123,630    $ 10,063,717    $ 14,140,987
                                                   ============    ============    ============
Supplemental disclosures:
  Cash paid during the year for:
     Interest....................................  $    186,218    $     80,763    $    473,289
     Income taxes................................       910,000      13,613,887       6,627,866
Details of acquisition:
  Fair value of assets acquired..................                                  $ 36,031,621
  Liabilities assumed............................                                   (11,731,621)
  Stock issued...................................                                   (22,800,000)
                                                                                   ------------
          Cash paid..............................                                  1,500,000...
  Less: cash acquired............................                                    (2,400,040)
                                                                                   ------------
          Net cash received from acquisition.....                                  $   (900,040)
                                                                                   ============
</TABLE>
 
     During fiscal 1997 and 1996, options and warrants for shares of common
stock were exercised by certain employees, directors and an underwriter. A tax
benefit of $419,595 and $57,330 in fiscal 1997 and 1996, respectively, was
recorded as an increase in additional paid-in capital and a reduction to income
taxes currently payable.
 
          See accompanying notes to consolidated financial statements.
 
                                       F-6
<PAGE>   45
 
                 QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. SIGNIFICANT ACCOUNTING POLICIES:
 
  Principles of Consolidation
 
     The consolidated financial statements of Quintel Communications, Inc. (the
"Company"), previously known as Quintel Entertainment, Inc. include the accounts
of its wholly-owned subsidiaries and its majority-owned and controlled joint
ventures. On September 10, 1996, the Company acquired the remaining interest in
New Lauderdale, L.C. ("New Lauderdale") (see Note 6). The consolidated financial
statements of the Company include the accounts of New Lauderdale subsequent to
this date. New Lauderdale had previously been accounted for by the equity method
as a 50% owned joint venture. All significant intercompany transactions and
balances have been eliminated in consolidation.
 
  Nature of Business
 
     The Company is engaged in the direct marketing and providing of various
telecommunications products and services. Additionally, the Company utilizes its
database to further provide direct marketing services under its residential long
distance customer acquisition programs. The Company's revenues from the
aforementioned are generated through the direct sale of products and services to
consumers and through revenue sharing arrangements with its residential long
distance customer acquisition clients. The telecommunications products and
services offered by the Company in the fiscal year ended November 30, 1998
consisted primarily of (i) telephone entertainment services, such as live
conversation horoscopes and psychic consultations, and memberships in
theme-related club 900 products ("Club 900 Products"); (ii) a residential
distributor program agreement with a long distance telephone service provider,
whereby the Company markets their residential long distance products; and (iii)
various enhanced telephone services, including enhanced voice mail services and
call-forwarding services.
 
     Consumers are solicited by the Company through a variety of marketing
techniques including television commercials and infomercials, print advertising,
direct mail, telemarketing, and premium gift offerings. Customers are also
obtained through solicitation by Psychic Readers Network, Inc. and Subsidiaries
("PRN") (see Note 6). The Company has contracts with a limited number of service
bureaus for the purpose of call processing, billing and collection. Under these
contracts, the bureaus process and accumulate call data, summarize the
information, and forward the data to the local telephone companies and/or long
distance carriers for the ultimate billing to and collection from the Company's
customers.
 
     The Company also contracts with numerous organizations, to provide live
operator services, computer services, telemarketing and other services necessary
to establish, fulfill and maintain the Company's programs. PRN currently
provides substantially all of the Company's live psychic operations. Certain
non-psychic services previously provided by PRN came under the direct control of
the Company in connection with the acquisition of New Lauderdale (see Note 6).
 
  Revenue recognition
 
     Revenues from all billable platforms are recorded at the time the customer
initiates a billable transaction, except for customer fees for club and Voice
Mail and EZ Page products and services ("VM"). New customer club and VM product
fees are recognized upon approved enrollment and when the service is rendered.
Continuing club and VM product fees are recognized as customers automatically
renew each month. These revenues are recognized net of an estimated provision
for customer chargebacks, which include refunds and credits.
 
     The Company, where applicable, estimates the reserve for customer
chargebacks monthly based on updated chargeback history. Chargebacks and other
provisions for new products and platforms without a history are based on
experience with similar products and platforms and adjusted as further
information becomes available. Since reserves are established prior to the
periods in which chargebacks are actually
 
                                       F-7
<PAGE>   46
                 QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
expended, the Company's revenues may be adjusted in later periods in the event
that the Company's incurred chargebacks vary from the estimated amounts. For the
years ended November 30, 1998, 1997 and 1996, provisions for chargebacks were
$56,496,612, $103,597,803 and $46,352,638, respectively.
 
     Revenues earned under the residential long distance customer acquisition
program (approximately $24,100,000 in 1998 and $26,500,000 in 1997) are recorded
upon the achievement of events particular to the program offering. Subsequent to
the delivery of the initial sales record to the respective long distance
carrier, the Company may be required to provide to the customer certain
fulfillment products and services, such as prepaid cellular phones and
complimentary airline tickets. All material costs applicable to the provision of
such fulfillment products and services are estimated and accrued in marketing
expenses at the time the associated revenues are recorded. This estimation is
adjusted to actual amounts in subsequent periods. Such programs revenues are not
encumbered by chargebacks.
 
  Accounts receivable
 
     The Company has maintained agreements with service bureaus that provide
advances against accounts receivable collections. Under the Company's current
agreement, interest is calculated at prime plus 3%. Amounts advanced under the
agreement is on a revolving basis and are primarily limited to 50% of a defined
borrowing base, net of related service fees and costs, as applicable. Certain
advances under the agreement are due on demand and all are collateralized by the
accounts receivable collected by the service bureaus. The Company did not use
any advances during fiscal 1998 and 1997. During fiscal 1996, the gross advances
and weighted average interest rate on the advances received were approximately
$9,156,355 and 13.17%.
 
  Concentration of credit risk
 
     Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash and cash equivalents, marketable
securities and accounts receivable.
 
     The Company invests a portion of its excess cash in debt instruments and
has established guidelines relative to diversification that maintain safety and
liquidity.
 
     The Company's collections are received primarily through three unrelated,
unaffiliated service bureaus which process and collect all of the Company's
billings. In conjunction with servicing the accounts receivable, the service
bureaus remit amounts based on eligible accounts receivable and withhold certain
cash receipts as a reserve. As a result, the Company's exposure to the
concentration of credit risk primarily relates to all collections on behalf of
the Company by these service bureaus.
 
     Cash balances are held principally at three financial institution and may,
at times, exceed insurable amounts. The Company believes it mitigates its risks
by investing in or through major financial institutions. Recoverability is
dependent upon the performance of the institutions.
 
  Transactions With Major Customers
 
     Revenues from one long distance carrier amounted to 20% during fiscal 1998.
It is anticipated that in fiscal 1999 this arrangement will account for a much
greater percentage of the Company's revenues. If this occurs, the Company would
be subject to significant economic dependence on such relationship.
 
  Cash and cash equivalents
 
     All short-term investments with an original maturity of three months or
less are considered to be cash equivalents.
 
                                       F-8
<PAGE>   47
                 QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Marketable securities
 
     The Company accounts for its investments using Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." The Company's marketable securities consist of government
obligations which they intend to hold only for an indefinite period of time. At
November 30, 1998 and 1997, all securities covered by SFAS No. 115 were
designated as available for sale. Accordingly, such securities are stated at
fair value, with unrealized gains and losses, net of estimated tax effects,
reported as a separate component of shareholders' equity, until realized. The
contractual maturities of all available for sale debt securities at November 30,
1998 and 1997 are within one year. The amortized cost of available for sale debt
securities are $15,036,713 and $24,737,345 at November 30, 1998 and 1997,
respectively.
 
     Gross unrealized holding losses were $10,488 and $3,983, respectively, net
of deferred taxes of $6,992 and $2,656, at November 30, 1998 and 1997,
respectively. Proceeds from the sale of securities classified as available for
sale for the year ended November 30, 1998 and 1997 were approximately
$81,977,000 and $55,500,000, respectively.
 
  Property, plant and equipment
 
     Property, plant and equipment are stated at cost and are depreciated using
the straight-line method over a five to seven year useful life depending on the
nature of the asset. Leasehold improvements are amortized over the life of the
improvement or the term of the lease, whichever is shorter. Expenditures for
maintenance and repairs are expensed as incurred while renewals and betterments
are capitalized.
 
     Upon retirement or disposal, the asset cost and related accumulated
depreciation and amortization are eliminated from the respective accounts and
the resulting gain or loss, if any, is included in the results of operations for
the period.
 
  Long-lived assets
 
     If events or changes in circumstances indicate that the carrying amount of
a long-lived asset may not be recoverable, the Company estimates the future cash
flows expected to result from the use of the asset and its eventual disposition.
If the sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the long-lived asset, an impairment
loss is recognized. (See Note 8.)
 
  Income taxes
 
     The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax liabilities and assets are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Valuation allowances are provided against
assets which are not likely to be realized.
 
  Advertising expenses
 
     The Company expenses advertising costs, which consist primarily of print,
media, production, telemarketing and direct mail related charges, when the
related advertising occurs. Total advertising expense for fiscal 1998, 1997, and
1996 were approximately $57,759,000, $81,576,000 and $31,795,000, respectively.
Included in prepaid expenses and other current assets is approximately $207,000
and $488,000 relating to prepaid advertising at November 30, 1998 and 1997,
respectively.
 
                                       F-9
<PAGE>   48
                 QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  Earnings per share
 
     In December 1997, the Financial Accounting Standards Board issued Statement
No. 128 "Earnings per Share" ("SFAS No. 128"). SFAS No. 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Earnings per share amounts for all periods have been
restated to conform to the SFAS No. 128 requirements.
 
  Reclassifications
 
     Certain reclassifications have been made to conform prior year amounts to
the current year presentation.
 
  Newly Issued Accounting Standards
 
     In June 1997, the FASB issued Statement of Accounting Standard No. 130,
"Reporting Comprehensive Income," ("SFAS No. 130"), which requires that changes
in comprehensive income be shown in a financial statement that is displayed in
the same prominence as other financial statements. SFAS No. 130 becomes
effective in fiscal 1999. Management will comply with the additional disclosure
provisions of the statement.
 
     In June 1997, the FASB issued Statement of Accounting Standard No. 131,
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS
131"), which changes the way public companies report information about segments.
SFAS 131, which is based on the management approach to segment reporting,
includes requirements to report selected segment information quarterly and
entity-wide disclosures about products and services, major customers, and the
material countries in which the entity holds and reports revenues. SFAS 131
becomes effective in fiscal 1999. The implementation of this new statement will
not affect the Company's results of operations and financial position, but will
have an impact on future financial statement disclosure.
 
  Estimates
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company's management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates. The
Company's most significant estimates relate to the reserve for customer
chargebacks, recoverability of long-lived assets, the realizability of the
deferred tax asset and fulfillment accrual for customer acquisition costs.
 
2. RELATED PARTY TRANSACTIONS:
 
     The Company purchased various mailing lists and design, copyrighting and
artistic development services from related entities owned by certain of the
Company's officers/shareholders. The agreements require the Company to pay fees
equal to 20% of rental revenues and a management fee of 10%, plus any fees in
connection with processing and mailing lists. During fiscal 1998, 1997 and 1996,
costs of approximately $10,000, $267,000 and $535,000, respectively, were
incurred by the Company for such services. During fiscal 1998, the related
entities were sold dissolving the related party relationship as of November 30,
1998.
 
     The Company incurred approximately $90,800, $107,000 and $242,000,
respectively, during fiscal 1998, 1997 and 1996, in accounting fees to a firm
having a member who is also a director of the Company. In addition, the Company
incurred approximately $431,000, $372,000 and $334,000, respectively, during
fiscal 1998, 1997 and 1996, in legal fees to a firm having a member who is also
a director of the Company.
 
     In connection with the acquisition of PRN's interest in New Lauderdale (see
Note 6), a principal shareholder of PRN was elected a director of the Company
and entered into an employment agreement with
 
                                      F-10
<PAGE>   49
                 QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
the Company (see Note 7). The Company incurred approximately $227,000, $206,000
and $39,000 in expense relating to this employment agreement in fiscal 1998,
1997 and 1996, respectively. Such principle shareholder resigned from his
position of director in January 1999.
 
     For the years ended November 30, 1998, 1997 and 1996, the Company paid
aggregate fees of approximately $7,023,000, $24,300,000 and $8,560,000,
respectively, to PRN for psychic operator services under an agreement that
extends to fiscal 2001. Since February 1996, PRN also provided certain
non-psychic services and facilities to the Company for approximately $14,000 per
month.
 
     During fiscal 1998 and 1997, the Company received commissions of
approximately $685,000 and $830,000, respectively, from PRN for purchasing
television media time on their behalf. In addition, receivables existed for such
commissions of approximately $578,000 and $73,000 at November 30, 1998 and 1997,
respectively.
 
     During the fourth quarter of fiscal 1997, the Company introduced a new club
membership program offering premium telephone services to its members for a one
time payment. In conjunction with the new program, the Company executed a
contract with PRN who has assumed the responsibility and obligation for the
fulfillment of all the recurring club services under the program. Under certain
circumstances, the Company is entitled to share in certain revenues, net of
expenses generated from additional services sold by PRN to the club members.
Such amounts were not material for fiscal 1998.
 
     On March 13, 1998, the Company purchased from a director of the Company,
1,969,601 shares of the Company's common stock for an aggregate purchase price
of $8,165,000. At the same time, the seller's employment by the Company was
terminated and she resigned from all directorships and offices she had held at
the Company or any affiliate thereof. The shares reacquired were subsequently
retired.
 
3. PROPERTY AND EQUIPMENT:
 
     Property and equipment for the years ended November 30, 1998 and 1997
consists of the following:
 
<TABLE>
<CAPTION>
                                                         1998          1997
                                                      ----------    ----------
<S>                                                   <C>           <C>
Furniture and fixtures..............................  $  314,536    $  297,445
Computers and equipment.............................   1,238,165       861,870
Telephone and facsimile.............................      57,582        46,992
Leasehold improvements..............................      51,146        51,145
                                                      ----------    ----------
                                                       1,661,429     1,257,452
Less, accumulated depreciation and amortization.....     517,528       215,662
                                                      ----------    ----------
                                                      $1,143,901    $1,041,790
                                                      ==========    ==========
</TABLE>
 
     Depreciation and amortization expense for the years ended November 30,
1998, 1997 and 1996 was approximately $304,000, $150,000 and $50,000,
respectively. (See Note 8.)
 
                                      F-11
<PAGE>   50
                 QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
4. INCOME TAXES:
 
     The (benefit) provision for income taxes consists of the following:
 
<TABLE>
<CAPTION>
                                               YEAR ENDED NOVEMBER 30,
                                      -----------------------------------------
                                         1998           1997           1996
                                      -----------    -----------    -----------
<S>                                   <C>            <C>            <C>
Federal:
  Current...........................                 $10,201,378    $ 8,852,749
  Deferred..........................  $(2,593,444)    (1,761,002)    (4,723,850)
                                      -----------    -----------    -----------
                                       (2,593,444)     8,440,376      4,128,899
                                      -----------    -----------    -----------
State:
  Current...........................      525,000      2,152,177      1,661,946
  Deferred..........................    1,650,980       (522,937)      (892,212)
                                      -----------    -----------    -----------
                                        2,175,980      1,629,240        769,734
                                      -----------    -----------    -----------
          Total provision...........  $  (417,464)   $10,069,616    $ 4,898,633
                                      ===========    ===========    ===========
</TABLE>
 
     The following is a reconciliation of the income tax expense computed using
the statutory federal income tax rate to the actual income tax expense and its
effective income tax rate:
 
<TABLE>
<CAPTION>
                                               YEAR ENDED NOVEMBER 30,
                                      -----------------------------------------
                                         1998           1997           1996
                                      -----------    -----------    -----------
<S>                                   <C>            <C>            <C>
Income tax (benefit) expense at
  federal statutory rate............  $(6,079,529)   $ 8,551,689    $ 5,975,572
State income taxes, net of federal
  income tax benefit................      341,250      1,059,006        500,327
Deferred benefit arising from
  conversion to C corporation.......                                 (1,781,700)
Goodwill amortization...............    3,623,519        179,636
Valuation allowance.................    1,679,082
Other, individually less than 5%....       18,214        279,285        204,434
                                      -----------    -----------    -----------
                                      $  (417,464)   $10,069,616    $ 4,898,633
                                      ===========    ===========    ===========
</TABLE>
 
     The components of deferred tax assets are as follows:
 
<TABLE>
<CAPTION>
                                                           NOVEMBER 30,
                                                    --------------------------
                                                       1998           1997
                                                    -----------    -----------
<S>                                                 <C>            <C>
Deferred tax assets:
  Current:
     Accrued expenses and reserves not currently
       deductible.................................  $ 3,401,790    $10,219,454
     Fixed assets and intangibles.................    2,006,164
     Net operating loss...........................    8,261,570
     Valuation allowance..........................   (1,679,082)
                                                    -----------    -----------
          Total current assets....................   11,990,442     10,219,454
Deferred tax liabilities:
  Current:
     Other........................................                    (198,397)
</TABLE>
 
                                      F-12
<PAGE>   51
                 QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                           NOVEMBER 30,
                                                    --------------------------
                                                       1998           1997
                                                    -----------    -----------
<S>                                                 <C>            <C>
  Noncurrent:
     Intangibles..................................                    (506,789)
                                                    -----------    -----------
          Net deferred tax asset..................  $11,990,442    $ 9,514,268
                                                    ===========    ===========
</TABLE>
 
     A $1,679,082 valuation allowance has reduced the deferred tax assets at
November 30, 1998 to an amount which the Company believes is more likely than
not to be realized. The deferred tax asset expected to be realized will be
through the execution of tax planning strategies and the recapture of taxes paid
on prior taxable income.
 
     The Company has approximately $21 million of Net Operating Losses expiring
through 2018 for Federal purposes which will be carried back in the Company's
1998 tax return. The Company's tax year is December 31.
 
5. REGULATORY ISSUES AND OTHER RISK CONSIDERATIONS:
 
     The Company's primary contact with its customers is over the telephone
lines and services of numerous local telephone companies and long distance
carriers. The Company cannot predict the impact, if any, of changes in various
regulations affecting the Company, directly, or through one of the telephone
companies.
 
     There can be no assurance that the Company will be able, for financial or
other reasons, to comply with applicable laws and regulations or that regulatory
authorities will not take action to limit or prevent the Company from
advertising, marketing or promoting its services and club and VM products and
services or otherwise require the Company to discontinue or substantially modify
the content of its services.
 
     The Company has received requests for information from regulatory
authorities, regarding investigations of certain of its telemarketing
activities. Management believes, based on advice from counsel, that their
investigations will not result in enforcement actions or claims which would have
a material adverse effect on the financial statements.
 
     The Company is dependent on service bureaus to process its calls, billings
and collections. In November 1998, three of the LECs refused to bill customers
for enhanced services provided by the Company. This was a result of what the
LECs' claim was excessive complaints by customers for "cramming" (unauthorized
charges billed to a customer's phone bill) against the Company and its
affiliates. This billing cessation effectively prevented the Company from
selling its enhanced services in those areas serviced by such LECs. The
remaining LECs have not altered their billing practices for the Company's
services and the Company continues to offer its enhanced services in those
areas.
 
     As a result of such LEC imposed billing cessation, in November 1998, the
primary billing service provider for the Company's enhanced services terminated
its arrangement with the Company for providing billing for the Company's
enhanced services. Such service bureau continues to service all data relating to
post-billing adjustments to records billed prior to the billing cessation. In
December 1998, the Company entered into an agreement with an alternate service
bureau whereby such service bureau provides the billing services previously
provided by the Company's primary enhanced service billing provider. In effect,
between the termination of the primary billing service arrangement and the
commencement of billing under the agreement with the alternate provider
(approximately two months), the Company was unable to bill for any enhanced
services provided.
 
     The Company is dependent on its service bureaus to provide quality services
on a timely basis on favorable terms. While the Company believes its service
bureau needs could be transferred to alternate providers, if necessary, no
contracts to cover such a contingency are currently in effect. Accordingly,
failure by
 
                                      F-13
<PAGE>   52
                 QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
any existing bureaus to provide services, such as that experienced at the end of
the fourth quarter of fiscal 1998, would result in material interruptions in the
Company's operations.
 
6. NEW LAUDERDALE:
 
     In December 1994, the Company entered into an agreement with PRN, an
unrelated entity at that time, to establish a joint venture known as New
Lauderdale, L.C. New Lauderdale operated "900" entertainment services. On
September 10, 1996, the Company acquired the remaining 50% interest in New
Lauderdale for 3,200,000 common shares. PRN subsequently distributed such shares
to its shareholders. In addition to receiving its share of New Lauderdale's
earnings through the closing date, PRN received approximately $1,500,000 in cash
for the deferred tax benefit to New Lauderdale resulting from the transaction.
The common shares were valued at the market price on the date of the letter of
intent ($7.125 per share). The acquisition was accounted for using the purchase
method of accounting and, accordingly, the purchase price was allocated to the
assets purchased based upon the fair values at the date of acquisition. As a
result, approximately $23,159,000 of the purchase price was allocated to
goodwill, customer lists and other intangibles which were being amortized on a
straight line basis over a period from 1 to 15 years. The operating results of
the acquisition have been included in the consolidated statement of income from
the date of the acquisition.
 
     The following pro forma information prepared assuming that this acquisition
had taken place on December 1, 1995 is not necessarily indicative of the results
of operations as they would have been had the transaction been effected on such
date. The pro forma information includes adjustments for amortization of
intangibles arising from the transaction and an adjustment of the tax provision
for fiscal 1995 representing the statutory federal rate assuming the Company had
always been a C corporation.
 
<TABLE>
<CAPTION>
                                                              NOVEMBER 30,
                                                                  1996
                                                              ------------
<S>                                                           <C>
Net revenues................................................  $150,284,451
Net income..................................................    12,351,385
Earnings per share..........................................           .66
</TABLE>
 
     As of November 30, 1997, the net book value of the intangibles, primarily
goodwill, was $19,496,608, net of accumulated amortization of $3,695,704.
Amortization expense was $982,173, $2,470,476 and $1,218,576 for the years ended
November 30, 1998, 1997 and 1996. During fiscal 1998, the Company determined
that the intangibles were impaired. See Note 8 -- Special Charges.
 
7. COMMITMENTS AND CONTINGENCIES:
 
  Leases
 
     The Company is obligated under two noncancelable real property operating
lease agreements that expire in fiscal 2004 and 2006. Future minimum rents
consist of the following at November 30, 1998:
 
<TABLE>
<S>                                                <C>
1999.............................................  $  500,246
2000.............................................     504,912
2001.............................................     542,145
2002.............................................     548,432
2003.............................................     554,927
Thereafter.......................................     989,245
                                                   ----------
                                                   $3,639,907
                                                   ==========
</TABLE>
 
                                      F-14
<PAGE>   53
                 QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The leases contain escalation clauses with respect to real estate taxes and
related operating costs. The accompanying financial statements reflect rent
expense on a straight-line basis over the term of the lease as required by
generally accepted accounting principles. Rent expense was $522,422, $383,867
and $210,153 for fiscal 1998, 1997 and 1996, respectively.
 
EMPLOYMENT AGREEMENTS AND CONSULTING
 
     The Company had executed employment agreements, which expired on November
30, 1998, with certain executive officers of the Company. In the event the
Company achieved pre-tax earnings of $10,000,000 or more for any such fiscal
year, the Company may have granted bonuses to such persons, subject to approval
of the Compensation Committee of the Board of Directors, in an aggregate amount
not to exceed 5% of pre-tax earnings for such year. Such bonuses amounted to
approximately $1,305,000 at November 30, 1997. No bonuses were granted during
fiscal 1998. Each of the individuals have agreed to continue to work as
employees-at-will until new agreements are approved by the Board of Directors.
 
     The Company had a consulting agreement with a director/shareholder, which
expired on November 30, 1998. Under the terms of such agreement, the
director/shareholder provided services in connection with identification and
engagement of celebrities to endorse the Company's services, engagement of
independent producers to produce commercials and infomercials and the
development of new entertainment services. The Company incurred approximately
$151,000, $137,000 and $125,000 in expense relating to this agreement in 1998,
1997 and 1996, respectively. Although the consulting agreement has expired, the
director/shareholder continues to provide the consulting services to the Company
and the Company compensates the director/ shareholder at a rate of $10,417 per
month. Such arrangements have not been formally agreed to and may be terminated
by either party at will.
 
     In connection with the acquisition of PRN's interest in New Lauderdale (see
Note 6), a principal shareholder of PRN was elected a director of the Company
and entered into an employment agreement with the Company. Minimum future
payments under this agreement are as follows:
 
<TABLE>
<S>                                                           <C>
1999........................................................  $249,562
2000........................................................   274,518
2001........................................................   100,657
                                                              --------
                                                              $624,737
                                                              ========
</TABLE>
 
  Other
 
     As a result of the acquisition of New Lauderdale (see Note 6), the Company
has agreements with various celebrities to promote its telephone entertainment
services. These agreements are generally for a term of one year, which may be
extended under certain circumstances, and grant worldwide rights to use an
individual's name and likeness in connection with services promoted by
advertisements. Compensation varies by individual and generally consists of an
advance payment and royalties based on defined revenues earned by the Company.
Total royalty expenses incurred for fiscal 1998, 1997 and 1996 were $124,837,
$399,395 and $261,566, respectively.
 
  Litigation
 
     On or about May 4, 1998, a complaint entitled "Joseph Chalverus, on behalf
of himself and all others similarly situated v. Quintel Entertainment, Inc.,
Jeffrey L. Schwartz and Daniel Harvey" was filed in the United States District
Court for the Southern District of New York; subsequently, a complaint entitled
"Richard M. Woodward, on behalf of himself and all others similarly situated v.
Quintel Entertainment, Inc., Jeffrey L. Schwartz and Daniel Harvey" was filed in
that same court, as was a complaint entitled
 
                                      F-15
<PAGE>   54
                 QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
"Dr. Michael Title, on behalf of himself and all others similarly situated v.
Jeffrey L. Schwartz, Jay Greenwald, Claudia Newman Hirsch, Andrew Stollman, Mark
Gutterman, Steven L. Feder, Michael G. Miller, Daniel Harvey and Quintel
Entertainment, Inc. (collectively, the "Complaints"). In addition to the
Company, the defendants named in the Complaints are present and former officers
and directors of the Company (the "Individual Defendants"). The plaintiffs seek
to bring the actions on behalf of a purported class of all persons or entities
who purchased shares of the Company's Common Stock from July 15, 1997 through
October 15, 1997 and who were damaged thereby, with certain exclusions. The
Complaints allege violations of Sections 10(b) and 20 of the Securities Exchange
Act of 1934, and allege that the defendants made misrepresentations and
omissions concerning the Company's financial results, operations and future
prospects, in particular relating to the Company's reserves for customer
chargebacks and its business relationship with AT&T. The Complaints allege that
the alleged misrepresentations and omissions caused the Company's Common Stock
to trade at inflated prices, thereby damaging plaintiffs and the members of the
purported class. The amount of damages sought by plaintiffs and the purported
class has not been specified.
 
     On September 18, 1998, the District Court ordered that the three actions be
consolidated, appointed a group of lead plaintiffs in the consolidated actions,
approved the lead plaintiffs' selection of counsel for the purported class in
the consolidated actions, and directed the lead plaintiffs to file a
consolidated complaint. The consolidated and amended class action complaint
("Consolidated Complaint") which has been filed asserts the same legal claims
based on essentially the same factual allegations as did the Complaints. On
February 19, 1999, the Company and the Individual Defendants filed a motion to
dismiss the Consolidated Complaint. Plaintiffs have served papers in opposition
to the motion to dismiss. The District Court has not yet rules on the motion to
dismiss. The Company believes that the allegations in the Complaints are without
merit, and intends to vigorously defend the consolidated actions. The Company is
unable at this time to assess the outcome of the Consolidated Complaint or the
materiality of the risk of loss in connection therewith, given the preliminary
stage of the Consolidated Complaint and the fact that the Consolidated Complaint
does not allege damages with specificity.
 
     An action was brought by Paramount Advertiser Services on August 13, 1998
against Access Resource Services, Inc. ("Access") and Quintel Media Management,
a subsidiary of the Company. The action alleges breach of a contract to purchase
advertising time as well as breach of a settlement agreement resolving earlier
disputes, and alleges resulting damages of approximately $3,300,000. Access has
agreed to indemnify the Company the total sum of $2,300,000, of which, as of
February 24, 1999, $1,050,000 has been placed in escrow. The Company believes
the claim is without merit and intends to vigorously defend against the action.
 
     A counterclaim action was brought against the Company by a supplier of
cellular phones alleging damages of $1,030,000 relating to a cancelled purchase
order. The Company had previously commenced an action against the supplier
seeking to recover approximately $480,000 from such supplier alleging breach of
the contract. The Company intends to pursue its claim against the supplier and
believes the counterclaim is without merit.
 
     Due to the early stage of the matters referred to in the preceding two
paragraphs, it is not possible to determine the amount of liability, if any,
that may result and exceed amounts recoverable under the guarantee.
 
8. SPECIAL CHARGES:
 
     During 1998, the Company experienced increased chargebacks and marketing
expenditures on its "900" entertainment services. As a result, this service was
not providing positive operating results and cash flow and the Company abandoned
marketing such services as an independent revenue source. Accordingly, as
required by Statement of Financial Accounting Standards No. 121, the Company
reviewed its long-lived assets, including goodwill, for impairment. The Company
determined that the "900" entertainment service could not be disposed of nor was
there a predictable estimate of any future cash flows associated with any
alternative use. The Company concluded that the intangibles, primarily goodwill,
arising from the acquisition
                                      F-16
<PAGE>   55
                 QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
of the remaining 50% interest in New Lauderdale, L.C. were entirely impaired. As
such, a non-cash charge of $18,514,435, representing the remaining balance of
the intangibles, was recorded in the second quarter of fiscal 1998.
 
     In addition, the Company recorded a non cash charge of approximately
$1,178,000 associated with the writedown of assets relating to the decision to
abort an Internet telephony program.
 
9. EARNINGS PER SHARE:
 
     The following table sets forth the reconciliation of the weighted average
shares used for basic and diluted earnings per share:
 
<TABLE>
<CAPTION>
                                                        YEARS ENDED NOVEMBER 30,
                                                 --------------------------------------
                                                    1998          1997          1996
                                                 ----------    ----------    ----------
<S>                                              <C>           <C>           <C>
Denominator:
  Denominator for basic earnings per share --
     weighted-average shares...................  17,034,531    18,560,064    15,918,881
Effect of dilutive securities:
  Stock options................................                   257,984       186,033
  Warrants.....................................                    60,742        19,829
                                                 ----------    ----------    ----------
  Denominator for diluted earnings per share --
     adjusted weighted-average shares..........  17,034,531    18,878,790    16,124,743
                                                 ==========    ==========    ==========
</TABLE>
 
     Options and warrants to purchase 1,579,796, 90,000 and 340,000, shares of
common stock were outstanding for the year end November 30, 1998, 1997 and 1996
respectively, but were not included in the computation of diluted earnings per
share because their effect would be anti-dilutive.
 
10. STOCK OPTION PLAN AND WARRANTS:
 
     During fiscal 1995, the Company implemented the 1995 Stock Option Plan (the
"Stock Option Plan") effective as of October 1995. The Stock Option Plan
provides for the grant of options to purchase up to 750,000 shares of the
Company's common stock either as incentive stock options ("Incentive Stock
Options") within the meaning of Section 422 of the United States Internal
Revenue Code or as options that are not intended to meet the requirements of
such section ("Nonstatutory Stock Options"). Options to purchase shares may be
granted under the Stock Option Plan to persons who, in the case of Incentive
Stock Options, are employees (including officers) of the Company, or, in the
case of Nonstatutory Stock Options, are employees (including officers),
consultants or nonemployee directors of the Company to the Company. The Stock
Option Plan was amended in September 1996 and in June 1997 to provide for the
granting of options to purchase an additional 500,000 and 600,000 shares,
respectively, of the Company's common stock. After these amendments, grants are
available under the Stock Option Plan to purchase a total of 1,850,000 shares of
the Company's common stock.
 
     The exercise price of options granted under the Stock Option Plan must be
at least equal to the fair market value of such shares on the date of grant, or,
in the case of Incentive Stock Options granted to a holder of 10% or more of the
Company's Common Stock, at least 110% of the fair market value of such shares on
the date of grant. The maximum exercise period for which Incentive Stock Options
may be granted is ten years from the date of grant (five years in the case of an
individual owning more than 10% of the Company's common stock). The aggregate
fair market value (determined at the date the option is granted) of shares with
respect to which Incentive Stock Options are exercisable for the first time by
the holder of the option during any calendar year shall not exceed $100,000. If
such amount exceeds $100,000, the Board of Directors or the Committee may, when
the Options are exercised and the shares transferred to an employee, designate
those
 
                                      F-17
<PAGE>   56
                 QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
shares that will be treated as Incentive Stock Options and those that will be
treated as Nonstatutory Stock Options.
 
     In addition, the Company's Stock Option Plan provides for certain automatic
grants of options to the Company's non-employee directors in consideration for
their services performed as directors of the Company and for attendance at
meetings. It provides for a one-time automatic grant of an option to purchase
25,000 shares of common stock at market value to those directors who were
serving on the Board of Directors at the inception of the Stock Option Plan and
also to those persons who become nonemployee directors of the Company in the
future, upon their appointment or election as directors of the Company. In
addition, the amended Stock Option Plan provides for quarterly grants to each
non-employee director of the Company of options to purchase 6,250 shares of the
Company's common stock at the market value on the date of each grant. During
fiscal 1998, the Company granted 143,750 options to the non-employee directors.
The Company's stock option committee approved the granting of an additional
626,390 options to certain employees.
 
     The stock option committee offered all option holders the right to have
their options repriced at $1.75 effective September 10, 1998. The repricing was
calculated based on the percentage of the new option price of $1.75 over the
original exercise price, applied to the number of options elected for repricing.
Total options available and elected for repricing were 1,415,078 and 878,078,
respectively. Total options surrendered as a result of the repricing amounted to
587,949. The repricing of the options is in compliance with the provisions of
the Stock Option Plan.
 
     A summary of the Company's stock options is as follows:
 
<TABLE>
<CAPTION>
                                           1998                          1997                        1996
                                ---------------------------   --------------------------   ------------------------
                                                WEIGHTED                     WEIGHTED                   WEIGHTED
                                                AVERAGE                      AVERAGE                     AVERAGE
                                                EXERCISE                     EXERCISE                   EXERCISE
                                  SHARES         PRICE         SHARES         PRICE         SHARES        PRICE
                                ----------   --------------   ---------   --------------   --------   -------------
<S>                             <C>          <C>              <C>         <C>              <C>        <C>
Options outstanding, beginning
  of year.....................     938,691   $4.75 to 15.56     653,850   $ 4.75 to 8.25    394,000   $   5.00
Granted.......................   1,129,374     1.75 to 6.75     470,500    7.31 to 15.56    297,250    4.75 to 8.25
Exercised.....................                                 (152,797)    5.00 to 6.00    (27,368)      5.00
Cancelled or lapsed*..........    (764,087)   2.69 to 15.56     (32,862)    5.00 to 6.00    (10,032)      5.00
                                ----------   --------------   ---------   --------------   --------   -------------
Options outstanding, end of
  year........................   1,303,978   $1.75 to 15.56     938,691   $4.75 to 15.56    653,850   $4.75 to 8.25
                                ==========   ==============   =========   ==============   ========   =============
Options exercisable, end of
  year........................     666,563                      645,952                     653,850
                                ==========                    =========                    ========
Options available for grant,
  end of year.................     365,857                      731,144                     568,782
                                ==========                    =========                    ========
Weighted-average fair value of
  options granted during the
  year........................  $     1.20                    $    5.82                    $   3.93
                                ==========                    =========                    ========
</TABLE>
 
------------
*Includes 587,949 shares surrended upon repricing
 
     The Company has elected to adopt the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized with regard
to options granted under the Plan in the accompanying financial statements. If
stock-based compensation costs had been recognized based on the estimated fair
values at the dates of grant
 
                                      F-18
<PAGE>   57
                 QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
for options awarded during the years ended November 30, 1998, 1997 and 1996. The
Company's net income (loss) and earnings (loss) per share would have been as
follows:
 
<TABLE>
<CAPTION>
                                                 1998           1997           1996
                                             ------------    -----------    -----------
<S>                                          <C>             <C>            <C>
Net (loss) income as reported..............  $(16,952,618)   $14,363,781    $12,174,430
                                             ============    ===========    ===========
Net (loss) income -- pro forma.............  $(18,369,678    $13,158,826    $11,760,015
                                             ============    ===========    ===========
Basic EPS -- as reported...................  $      (1.00)   $       .77    $       .76
                                             ============    ===========    ===========
Diluted EPS -- as reported.................  $      (1.00)   $       .76    $       .76
                                             ============    ===========    ===========
Basic EPS-Pro forma........................  $      (1.08)   $       .71    $       .73
                                             ============    ===========    ===========
Diluted EPS-Pro forma......................  $      (1.08)   $       .70    $       .73
                                             ============    ===========    ===========
</TABLE>
 
     The weighted average fair value of each option has been estimated on the
date of grant using the Black Scholes options pricing model with the following
weighted average assumptions used for all grants of 65.4% in 1998 and 58.5% in
1997 and 1996; risk-free interest rate ranging from 4.67% to 4.80% in 1998 and
6.17% to 6.50% in 1997 and 1996; and expected lives of approximately 4.8 years.
Weighted averages are used because of varying assumed exercise dates.
 
     The following table summarizes information about stock options outstanding
at November 30, 1998:
 
<TABLE>
<CAPTION>
                                                    WEIGHTED
                                                     AVERAGE       WEIGHTED                      WEIGHTED
                                                    REMAINING       AVERAGE                       AVERAGE
RANGE OF                              SHARES       CONTRACTUAL    EXERCISABLE      SHARES       EXERCISABLE
EXERCISE PRICES                     OUTSTANDING       LIFE           PRICE       EXERCISABLE       PRICE
---------------                     -----------    -----------    -----------    -----------    -----------
<S>                                 <C>            <C>            <C>            <C>            <C>
$1.75-$2.63.......................   1,131,478         9.8          $ 1.90         510,729        $ 1.90
$2.69-$3.81.......................      37,500         9.7            3.06          20,834          3.36
$4.75-$6.00.......................      85,000         7.6            5.18          85,000          5.18
$9.38-$11.31......................      37,500         8.4           10.60          37,500         10.60
$15.56-$15.56.....................      12,500         8.6           15.56          12,500         15.56
                                     ---------         ---          ------         -------        ------
$1.75-$15.56......................   1,303,978         9.6          $ 2.53         666,563        $ 3.11
                                     =========         ===          ======         =======        ======
</TABLE>
 
     As of November 30, 1998 and 1997, the Company had 275,818 warrants to
purchase common stock at an exercise price of $8.25 per share. The warrants are
exercisable through 2000.
 
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
 
     The following is a summary of the unaudited quarterly results of operations
for fiscal 1998, 1997 and 1996:
 
<TABLE>
<CAPTION>
                                                                  QUARTER ENDED
                                             --------------------------------------------------------
                                             NOVEMBER 30,   AUGUST 31,      MAY 31,      FEBRUARY 28,
                                             ------------   -----------   ------------   ------------
<S>                                          <C>            <C>           <C>            <C>
1998:
  Net revenues.............................  $20,285,085    $16,509,577   $ 21,259,988   $36,635,601
  Gross profit.............................   (2,296,938)     5,070,872      1,380,175    10,499,027
  (Loss) income before income taxes........   (5,068,084)     2,055,824    (20,505,128)    6,147,306
  Net (loss) income........................   (6,591,590)     1,460,902    (15,510,314)    3,688,384
  Basic (loss) earnings per share..........         (.43)           .09           (.91)          .20
  Diluted (loss) earnings per share........         (.43)           .09           (.91)          .20
</TABLE>
 
                                      F-19
<PAGE>   58
                 QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                  QUARTER ENDED
                                             --------------------------------------------------------
                                             NOVEMBER 30,   AUGUST 31,      MAY 31,      FEBRUARY 28,
                                             ------------   -----------   ------------   ------------
<S>                                          <C>            <C>           <C>            <C>
1997:
  Net revenues.............................  $49,302,822    $44,688,568   $ 53,323,734   $44,059,812
  Gross profit.............................   10,072,085      4,152,170     13,786,298    13,543,020
  Income before income taxes...............  5,420,442..        307,049      9,660,751     9,045,155
  Net income...............................    2,911,615        184,229      5,832,540     5,435,397
  Basic earnings per share.................         0.15           0.01           0.31          0.29
  Diluted earnings per share...............         0.16           0.01           0.31          0.29
1996:
  Net revenues.............................  $39,389,333..  $17,493,179   $ 13,765,685   $16,018,571
  Gross profit.............................   11,288,981      5,737,501      1,638,439     3,340,591
  Income before income taxes...............    7,080,889      4,918,871      1,142,807     3,930,396
  Net income...............................    4,165,501      3,111,288        595,452     4,302,189
  Basic earnings per share.................         0.23           0.20           0.04          0.29
  Diluted earnings per share...............         0.23           0.20           0.04          0.28
</TABLE>
 
     During the fourth quarter of fiscal 1996, the Company recorded an accrual
of approximately $1,070,000 relating to compensation.
 
     The fourth quarter of fiscal 1997 included an increase of approximately
$200,000 for state income taxes. This increase was attributable to increased
revenues in the states where the Company is subject to higher tax rates.
 
     During the fourth quarter of fiscal 1998, the Company reduced the benefit
for income taxes by approximately $2,550,000 due to a change in the estimate of
the amount of permanent differences, primarily goodwill, due to its accelerated
write-off, and deferred tax asset valuation reserves .
 
                                      F-20
<PAGE>   59
 
                  QUINTEL ENTERTAINMENT, INC. AND SUBSIDIARIES
 
         SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
 
<TABLE>
<CAPTION>
           COL. A                COL. B                   COL. C                   COL. D          COL. E
-----------------------------  -----------     ----------------------------     -------------    -----------
                                                        ADDITIONS
                                               ----------------------------
                               BALANCE AT       CHARGED TO      CHARGED TO                       BALANCE AT
                                BEGINNING       COSTS AND         OTHER         DEDUCTIONS --      END OF
DESCRIPTION                     OF PERIOD        EXPENSES      ACCOUNTS(1)       DESCRIBE(3)       PERIOD
-----------                    -----------     ------------    ------------     -------------    -----------
<S>                            <C>             <C>             <C>              <C>              <C>
YEAR ENDED NOVEMBER 30, 1998
  Reserve for customer
     chargebacks.............  $38,196,114     $    --         $ 56,496,612      $79,198,588     $15,494,138
                               ===========     ============    ============      ===========     ===========
YEAR ENDED NOVEMBER 30, 1997
  Reserve for customer
     chargebacks.............  $20,080,903     $    --         $103,597,803      $85,482,592     $38,196,114
                               ===========     ============    ============      ===========     ===========
YEAR ENDED NOVEMBER 30, 1996
  Reserve for customer
     chargebacks.............  $ 4,025,130     $    --         $ 55,689,393(2)   $39,633,620     $20,080,903
                               ===========     ============    ============      ===========     ===========
</TABLE>
 
---------------
(1) Charged against revenues.
 
(2) Includes assumed liability in connection with New Lauderdale acquisition of
    $9,336,755 (see Note 6).
 
(3) Chargebacks refunded during the year.
 
                                       S-1
<PAGE>   60
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER
 -------
<S>         <C>                                                             <C>
3.1.1       Articles of Incorporation of the Company, as amended(1)
3.1.2       Amendment to the Articles of Incorporation of the
            Registrant(2)
3.2         By-Laws of the Company(3)
10.1        Employment Agreement by and between the Company and Steven
            L. Feder(4)
10.2.1      Definitive Form of Non-Competition and Right of First
            Refusal Agreement between the Company and Steven L. Feder,
            Thomas H. Lindsey and Peter Stolz(4)
10.2.2      Definitive Form of Non-Competition and Right of First
            Refusal Agreement between the Company and Psychic Readers
            Network, Inc.(4)
10.2.3*+    Agreement Regarding 900 Number Telecommunications Programs
            and Modification of Noncompetition Agreement and Media
            Agreement between Access Resource Services, Inc. and the
            Company
10.2.4*+    Marketing Agreement between Access Resource Services, Inc.
            and the Company
10.2.5*+    Club Operating Agreement among Access Resource Services,
            Inc., Real Communication Services, Inc., Bahia Encounters,
            Inc., Steven L. Feder and the Company
10.3        Amended and Restated 1996 Stock Option Plan(5)
10.4.1      Lease of the Company's offices at One Blue Hill Plaza, Pearl
            River, New York(6)
10.4.2      Lease of office space for Calling Card Co., Inc. at 2455
            East Sunrise Boulevard, Fort Lauderdale, Florida(7)(P)
10.5*       Purchase and Sale Agreement among Paradigm Direct, Inc.,
            Paradigm Cellular, LLC and the Company
10.6*+      Servicing Agreement between West Interactive Corporation and
            the Company
10.7        Collateral Note and Security Agreement between West
            Interactive Corporation and the Company(3)
10.8        Collateral Note and Security Agreement between West
            Interactive Corporation and New Lauderdale(3)
10.9        Telemarketing Services Agreement between West Telemarketing
            Corporation Outbound and the Company(3)
10.10+      Billing and Information Management Services Agreement and
            Advanced Payment Agreement between Enhanced Services
            Billing, Inc. and the Company(3)
10.11       Amended and Restated Psychic Readers Network Live Operator
            Service Agreement between Psychic Readers Network, Inc. and
            the Company(4)
10.12+      Telemarketing Services Agreement between Advanced Access,
            Inc. and the Company(6)(P)
10.13+      Telemarketing Services Agreement between APAC TeleServices,
            Inc. and the Company(6)(P)
10.14+      Telemarketing Services Agreement between AT&T Wireless
            Services and the Company(6)(P)
10.15.1+    Telemarketing Services Agreement between AT&T Wireless
            Services and Paradigm Direct, Inc.(7)(P)
10.15.2*    Telemarketing Services Agreement between Paradigm Direct,
            Inc. and the Company
10.15.3*    Termination Agreement between Paradigm Direct, Inc. and the
            Company
10.16+      Telemarketing Services Agreement between Optima Direct, Inc.
            and the Company(6)(P)
10.17.1*    Marketing Services Agreement between Delta Three Direct LLC
            and the Company
10.17.2*    Operating Agreement of Delta Three Direct LLC
10.17.3*    Network Services Agreement between Delta Three, Inc. and
            Delta Three Direct LLC
10.17.4*+   Network Services Agreement between RSL Com U.S.A., Inc. and
            Delta Three Direct LLC
</TABLE>
<PAGE>   61
 
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER
 -------
<S>         <C>                                                             <C>
10.19+      Telemarketing Services Agreements between New Media
            Telecommunications, Inc. and the Company(6)(P)
10.19.1+    Telecommunications Services Agreement between AT&T
            Communications, Inc. and the Company(6)(P)
10.19.2+    Letter Agreement, dated November 12, 1997, amending the
            Telecommunications Services Agreement between AT&T
            Communications, Inc. and the Company(7)(P)
10.19.3+    Letter Agreement, dated January 19, 1998, amending the
            Telecommunications Services Agreement between AT&T
            Communications, Inc. and the Company(7)
10.20+      Billing and Collection Services Agreement between Federal
            Transtel, Inc. and the Company(6)(P)
10.21*      Billing and Information Management Services Agreement
            between Billing Concepts, Inc. and the Company
10.22+      Ownership Agreement between the Company, Calling Card Co.,
            Inc., Access Resource Services, Inc. and Real Communication
            Services, Inc.(7)
10.23.1+    Telecommunications Services Agreement between LCI
            International Telecom Corp. and the Company(7)(P)
10.23.2*+   Amendment to the Telecommunications Services Agreement
            between LCI International Telecom Corp. and the Company
10.23.3*+   Amended and Restated Telecommunications Services Agreement
            between LCI International Telecom Corp., d/b/a Qwest
            Communications Services, and the Company
10.24.1     Limited Liability Company Agreement between the Company and
            Paragon Cellular Services, Inc.(7)
10.24.2     Amendment No. 1 to Limited Liability Company Agreement
            between the Company and Paragon Cellular Services, Inc.(7)
10.25*+     Cellular Telephone Product and Service Agreement between
            U.S. Mobile Services, Inc. and the Company
10.26.1*+   Settlement and Release of New Lauderdale
10.26.2*+   Settlement and Release of Calling Card Co., Inc.
10.27*+     Media Agreement between Access Resource Services, Inc. and
            the Company
10.28*      Software License Agreement between US/Intelicom, Inc. and
            the Company
10.29.1*+   License Agreement between the Company and a Confidential
            Third Party
10.29.2*+   Escrow Agreement between the Company, the Law Firm of
            Swidler Berlin Shereff Friedman, LLP and a Confidential
            Third Party
21*         Subsidiaries of the Company
27*         Financial Data Schedule
</TABLE>
 
---------------
 *  Filed herewith.
 
 + Confidential treatment requested as to portions of this Exhibit.
 
(1) Filed as an Exhibit to the Company's Registration Statement on Form 8-A,
    dated October 23, 1995, and incorporated herein by reference.
 
(2) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
    fiscal quarter ended August 31, 1998, and incorporated herein by reference.
 
(3) Filed as an Exhibit to the Company's Registration Statement on Form S-1 (the
    "S-1 Registration Statement"), dated September 6, 1995 (File No. 33-96632),
    and incorporated herein by reference.
 
(4) Filed as an Exhibit to a Definitive Information Statement filed with the
    Commission, dated August 20, 1996, and incorporated herein by reference.
 
(5) Filed as an Exhibit to the Company's Proxy Statement filed with the
    Commission, dated July 21, 1997 and incorporated herein by reference.
<PAGE>   62
 
(6) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
    fiscal year ended November 30, 1996, and incorporated herein by reference.
 
(7) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
    fiscal year ended November 30, 1997, and incorporated herein by reference.
 
(P) Filed by paper with the Commission pursuant to a continuing hardship
    exemption.